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Tax saving strategies for all ages

You can make your maddening February a very sane one. The key is to
understand how tax-saving investments could fit into the big picture of your
finances and adopt approaches that will help you choose the right tax-saving
investments.

Link tax saving investments to long term goal: "Like all other investments,
tax-saving investments too need to be linked to your goals," says Lovaii Navlakhi,
a Bengaluru-based financial planner. Given the fact that tax-saving investments
are mostly long-term investment products with lock-in periods of various lengths,
it makes sense to earmark them for long term goals such as kids' future and your
own retirement.

This means other goals such as car and home acquisitions require other
investments. "Debt options qualifying for Section 80C such as 5 year bank or
post-office fixed deposits could help in such cases," says Gaurav Mashruwala, a
Mumbai-based financial planner.

• Tax? 10 things to do before March 31

Choose on the basis of post-tax returns. The next equally important selection
criterion is the post-tax return of tax-saving investments you choose. For
instance, the National Savings Certificate (NSC) provides you with Section 80C
benefits but its returns, currently 8 per cent annually, is taxable. This makes its
effective post tax return 5.53 per cent.

Tax saving strategies during your lifetime

Early years: When you start working, the savings for tax-saving investments
might be all your savings as expenses are in hot pursuit of your income. Like the
rest of your working life, during this period too, your provident fund savings will by
default take up some portion of the total Section 80C deduction.

Start with PPF: During this period, it is important to start your tax-saving
investments with a public provident fundaccount.

Given its safety -- it's government backed -- with relatively high returns, currently
8 per cent per annum, and tax exemptions on its interest earnings and the final
corpus, its effective post-tax return currently works out to above 11.57 per cent
(for someone paying 30.9 per cent tax). Given its Rs 500 per year minimum
investment stipulation, with one contribution allowed every month, you can even
invest small amounts for your long-term.

Get the ELSS growth kicker: During this stage of your life, since you are likely
to be without major responsibilities or liabilities, you are in a position to take
investment risk such as those involved in equity mutual funds. This is why many
financial experts recommend that you invest in equity linked savings schemes of
mutual funds.

With ELSS, you can channelise even small amounts of investments, amounts as
less as Rs 1,000 every month in equity mutual funds through systematic
investment plans. For less financially literate people who struggle to save
regularly and would prefer to rely on investment products of insurance
companies, the option of investing in highest equity exposure variant of unit
linked insurance plans (Ulips) exists. You can opt for a pension plan to augment
your PF investments.

When you get married. . . : By the time you are married, your income would
have gone up further and your provident fund deduction would have gone up too.
This will leave you with lesser elbow room with Section 80C investments. After
mandatory PF deductions, the first charge on Section 80C investments from now
on would be of life insurance premium payments.

"Your life cover shouldn't depend on the tax exemptions you get," points out
Navlakhi. You need adequate life cover, whether you get tax breaks or not.
Experts like him argue that since life insurance purchases were motivated by tax
savings, people remained underinsured.

One way of having your cake and eating it too would be to take low-premium,
high cover term insurance plans. These will still leave you with adequate portion
of Section 80C entitlements even after PF deductions.

After term insurance, you can continue with your PPF and ELSS investments. If
possible increase them to exhaust the Section 80C limit. In case of a double
income household, ensure most of the tax saving investments is from the income
in the higher tax slab. If both the incomes are in the highest tax slab, risk taking
capability is higher. This means that such a couple needs to invest more in
ELSS, besides both investing in PPF.

. . . and have kids: By the time you have kids, the PF deduction would have
gone up further with the rise in income. "Beyond an annual income of Rs 5-6
lakh, there isn't too much you can do in terms of tax-saving investments," says
Mashruwala.

While the life cover through term plans needs to go up, in case of a double
income family, lives of both the spouses should be covered since there are
dependent kids. While you need to continue with your PPF and ELSS
contributions, you could also claim Section 80C benefits for contributions to kids'
PPF accounts (each parent can claim up to a combined limit of Rs 70,000 of tax
deduction for contributions to their individual and kids accounts).
• 9 great ways to reduce tax burden

But none can have more then one account in his/her name. Contributions to kids'
PPF account really helps if you still have some distance to go before the Rs 1
lakh limit. But the chances are that by the time you have kids, you have a host of
items that qualify for Section 80C and these add up to more than Rs 1 lakh.

Two major additional items at this stage typically qualifying for deductions would
be principal repayment of home loans and tuition expenses of kids. Regardless,
of whether you claim these expenses or not you will need to continue, and ideally
increase your previous investments in term plans, PPF and ELSS. If ELSS
investments don't qualify for Section 80C benefits due to exhaustion of the limit,
you could concentrate more on top performing open-ended diversified equity
funds.

Nearing retirement: As you near retirement, you would like to invest in options
without lock-ins. "It is better to keep investing in existing investments such as
PPF and claim tax benefits for expenses such as kids' tuition expenses and
principal repayment of home loans," says Veer Sardesai, a Pune-based financial
planner.

There is one more option still. "You could increase the contribution to your PF
since you will be getting the money shortly and give further impetus to the
compounding effect," says Gautam Nayak, a Mumbai-based tax expert.

In retirement: When you are retired, your Section 80C obligations might not be
much. Here, you can opt for Senior Citizens' Savings Schemes (SCSS) recently
made eligible for tax deduction and which provides regular income through a
return of 9 per cent on the invested amount (upper limit: Rs 15 lakh).

The key is to ensure that your investments in income producing investments are
not more than your expenses since they won't help you combat inflation. There is
one more tax-saving option. "You continue investing in PPF even as you make
partial withdrawals from it to get tax-free income," suggests Nayak.

In the course of time, rising incomes, lowering tax rates and plugging tax
exemptions has meant limited latitude to individuals to save on taxes. But as we
have shown there is still enough room and enough ways by which tax-saving
investments could become a part of your larger financial gameplan.
9 great ways to reduce tax burden

February 07, 2008

One of the most common questions by all is: what should I buy to milk the tax breaks
that I am legally allowed? So here is a guide to the deductions you can use apart from the
popular section 80C Rs 1-lakh deduction.

Look beyond section 80C cut your tax burden further. Remember, you will have to spend
under a specific head to claim these sweet little tax breaks. Charity, education loans and
medical bills; all qualify for a tax break.

1. 80C
Qualifying products: NSC, notified bank deposits and post office time deposits, EPF
and PPF, ELSS, life insurance plans, deferred pension plans

Mandatory requirements: Payment has to be made before 31 March 2008

Who can avail the deduction: Individuals and HUF (both resident and non-resident)

2. 80CCC
Qualifying products: Pension plans of life insurers

Mandatory requirements: Payment has to be made before 31 March 2008

Who can avail the deduction: Individuals

How much: Within the overall limit of Section 80C (up to Rs 1 lakh)

3. 80D
Qualifying products: Medical insurance policies taken for self, spouse, dependant
parents or children, or any member of HUF

Mandatory requirements: Premium should be paid through a cheque out of income


chargeable to tax

Who can avail the deduction: Individuals, HUF

How much: Up to Rs 15,000; senior citizens can claim up to Rs 20,000


4. 80DD
Qualifying products: Expenses on the medical treatment of a dependent who is a person
with a disability

Mandatory requirements: Certification by a medical authority

Who can avail the deduction: Resident individual or HUF

How much: Up to Rs 50,000, or up to Rs 75,000 if the dependant is a person with severe


disability

5. 80DDB
Qualifying products: Expenses on the medical treatment of a specified disease (cancer,
AIDS, neurological diseases, chronic renal failure and more)

Mandatory requirements: Certificate in Form No. 10-I to be submitted along with the
income tax return form. Deduction is available if the amount is actually paid for
treatment

Who can avail the deduction: Resident individuals or HUF

How much: Rs 40,000 (if the person treated upon is less than 65 years of age), or Rs
60,000 (if the age of the person treated is 65 years or more)

6. 80E
Qualifying products: Payment of interest on loan taken for higher studies

Mandatory requirements: Deduction is available in the year in which repayment starts


and only for eight immediately succeeding assessment years

Who can avail the deduction: Individuals

How much: Deduction available on the total interest portion of education loan, the
principal repayment gets no tax advantage

7. 80G
Qualifying products: Donations to certain funds and charitable institutions

Mandatory requirements: Not applicable


Who can avail the deduction: Resident individuals or HUF

How much: 50 or 100 per cent deduction on the entire donated amount, or 50 or 100 per
cent deduction subject to 10 per cent of gross total income

8. 80GG
Qualifying products: Rent paid for residential purpose

Mandatory requirements: Should not be getting house rent allowance. Actual rent paid
is in excess of 10% of the total income

Who can avail the deduction: Self-employed or salaried

How much: Excess of actual rent paid over 10 per cent of GTI, or 25 per cent of GTI, or
Rs 2,000 per month, whichever is the lowest

9. 80U
Qualifying products: Expenses incurred on self, if disabled

Mandatory requirements: Certification by a medical authority to be furnished along


with the income tax return form

Who can avail the deduction: Resident individuals

How much: Rs 50,000 for a person with disability, Rs 75,000 for a person with severe
disability (disability of over 80 per cent)
7 super tax saving, fixed income plans
Sunil Dhawan, Outlook Money

February 07, 2008

If you like the safety of a steady predictable income, every month, quarter or year, then there are a number
of tax-saving instruments available for you. In fact, most of the tax-saving paper you could buy earlier was
in this category.

For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are
the products for you.

Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare
with those from equity-related products that have returned over 40 per cent in the last few years. But then,
the return you get is also market risk-free. At the end of every designated period, you know you will get a
certain amount.

And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk,
such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The
choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)

Vantage points

Three important things that one needs to look at before investing in any of the mentioned fixed income
instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the
interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully
taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22
per cent.

PPF Calculator

Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public
provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief
under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank
deposits half-yearly, and time deposits annually.

So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not
quite correct, although you would have to get a little active about your investments in that case.

Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the
financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly
returns as the instruments mature in a phased manner.

So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.

Fixed Income Tax Saving Options


Investment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment
life insurance plans give bonus-based returns
Instrument available Duration (yrs) Returns (%) Compounding Taxability of income Yield� (%)
Bank Fixed Deposit (Tax 5 8.50� Quarterly Interest taxable 5.87
savers)
Employee Provident Fund Till retirement 8.50� Yearly Tax-free 12.30
Life Insurance 10 and more Around 6.00� Yearly Tax-free 8.68
(Endowment)
National Savings Certificate 6 8.00 Half-yearly Interest taxable 5.53
Post Office Time Deposits 5 7.50 Quarterly Interest taxable 5.18
Public Provident Fund 15 8.00 Yearly Tax-free 11.57
Senior Citizens' Savings 5 9.00 Quarterly Interest taxable 6.22
Scheme
� Applicable to 30% tax slab, including education cess | � May vary from bank to bank | � Fixed by govt each year | �
Internal rate of return based on bonuses