Smart Tax Saving Options

by khalid on 19/02/2011 · 1 comment

The last three months of the financial year are used to be considered as tax saving months by most of the tax payers though it is wrong conception. Similarly every tax payer knows that he has to pay certain amount of tax from his hard earned money even though he or she don’t plan for that.

Indian Government has provide many options in the Income tax Act, 1961 under several sections like 80C, 80CCC and 80CCD. These laws enable tax payers to reduce their taxable income upto a maximum of Rs 1 lakh.

Under section 80C, some of the prominent options are contributions to Employees Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), and Bank Fixed Deposit for tenure of 5 years, Equity Linked Savings Schemes (ELSS), Life Insurance Premium and Principal component of the EMI for housing loan.

A new section has been introduced some years back is 80CCF, under this individual investors can invest up to Rs 20,000 in infrastructure bonds in addition to the Rs 1 lakh limit available under Sections 80C, 80CCC and 80CCD and can save some more tax.

Basic and almost compulsory options of investments are EPF and LIC premiums. A good portion of Rs 1 lakh should go in these two options. After the EPF and LIC premiums the tax payers should consider other options like debt based investments or equity based investments.

For taxpayers who do not mind conservative returns to ensure safety of the principal amount, investment in PPF, Bank FDs, NSCs can be the likely options. Amongst all these safer options, PPF scores over others as one that not only earns a fixed return of 8% but also one is not liable to pay any tax on it. However, there are limitations too. Firstly, it has a maturity period of 15 years. Secondly, there is a cap on the maximum amount that one can invest in it i.e. Rs 70,000 every year.

However, for those who would like to get positive real rate of returns i.e. return minus inflation over time and wouldn’t mind taking commensurate risk to achieve this, ELSS can an ideal investment option. ELSS is the best example of an investment option that provides a very simple way of investing in the stock market and save taxes while doing so. Under ELSS, one can invest up to Rs 1 lakh and save taxes.

Many investors make the mistake of not including tax savings investments as a part of their overall investment process. As a result, they end up investing in a haphazard manner and that reflects in the performance of the portfolio. Hence, one needs to strategize one’s tax saving investments and rely on smart options like ELSS to get the best results.

Unfortunately, with the implementation of new Direct Tax Code from April 1, 2012, the ELSS will cease to exist. It would be a pity as ELSS has emerged as a great option for the first time investors to learn the ropes of equity investing. So make the most of it while it is there.

We hope positively from the Government to bring another good option like ELSS under DTC for encouraging investors to save tax and participate in equity as well.

Related Posts Plugin for WordPress, Blogger...

Leave a Comment

{ 1 trackback }

Previous post:

Next post: