For many, of course, this is no longer a big issue. Firstly, the limit of Rs.1 lakh u/s 80C has remained unchanged for many years and is nowadays not a very big amount to plan for. Secondly, mandatory deductions towards EPF, home loan principal and premiums of insurance policies bought in the past, more or less exhaust this limit.
However, for those who have some gap available and those who are new to tax saving, Income Tax Act offers many avenues to save tax. Therefore, careful planning is necessary to ensure that you make the right choice. Tax saving should not be looked at in isolation. Rather, it should be aligned to one's financial goals and risk appetite.
Section 80C
This section offers deduction up to a sum of Rs.1 lakh from taxable income provided you either make (a) specified investments or (b) specified payments
(a) Specified Investments
1. PPF is one of the best tax saving options under Sec 80C. It offers tax-free interest (= 8.7% in 2013-14) and is very safe. Hence, this should normally be one of the most preferred investments.
2. Next is the Equity Linked Saving Scheme (ELSS), a mutual fund that offers tax saving u/s 80C with a 3-year lock-in (the shortest lock-in period) and investment is in the share market. As it invests in equities, it carries higher risk. But it also has the potential to deliver high and tax-free returns. Hence, it can be the 2nd most preferred option.
3. If you don't mind locking in your money till retirement, you can increase your investment into PF (called Voluntary PF) over and above the 12% mandatory deposit. Given that it offers tax-free interest income and is very safe, makes it a good option to save tax.
4. Deposits such 5-year Bank FD, NSC, Post-Office Time Deposit, Senior Citizen Savings Scheme also offer tax benefit. But as the interest income from such deposits is taxable, the post-tax returns may not be very attractive and hence these are not a preferred tax saving option.
5. Since ELSS Plans score over Unit Linked Insurance Plans, ULIPs are best avoided.
6. Money-back / Endowment Life Insurance yield low returns and are long term contracts with very low flexibility. Hence, these should be avoided for tax savings purposes. At best, one can consider Term Insurance policies to provide life cover and tax saving.
7. Pension Plans not only yield low returns but also are tax-inefficient (National Pension System too is highly tax-inefficient). Hence, these too should be avoided.
(b) Specified Payments
i. Repayment of your home loan principal (but if you sell the house before 5 years, the deduction will be reversed and tax will become payable)
ii. Stamp Duty and Registration Fees (provided the construction and registration happen in the same year)
iii. Tuition fees paid to any school, college etc. for full-time education of up to two children (development fees, donations, etc. are not eligible)
Tomorrow we look at other sections of I.T. Act whereby tax saving is possible.
