Prepone Your Tax Planning

The  financial year 2010  2011 has just ended and we are at the beginning of new financial year 2011-2012. The memories of last hour rush of making investments for claiming the tax benefits under Section 80C is still fresh in our minds. And these are certainly not very pleasant!

How about planning investments in advance to avoid last minute rush and bid good bye to the year peacefully?
So how you can do the tax planning for the current year right now by making sound investment decisions without having to wait for the year end?

Items eligible for deduction

There are many items in respect of which you can claim the deductions under Section 80C. These can be classified in two categories First is investment category , in which ELSS, PPF, PF, NSC, Deposits under Senior Citizen Deposit Schemes and Tax FD etc. are covered and the second is expenses category where Life Insurance premiums and education expenses incurred for your child are covered.

These items can be further divided in two categories – Mandatory and Discretionary.
So first take into account the mandatory items in which it is compulsory to invest like Life Insurance Premium, School fee for your kids, your contribution to employee provident fund and repayment of your housing loan, etc.

The mandatory items are elaborated below for your benefit:

School Fee: You can claim deduction in respect of tuition fee paid for the education of your two children in any school, college, university or any educational institution for full time education in India only. The deduction is available for two children only. However in case you have more than two children and your spouse is also a tax payer, the deduction in respect of other child can be claimed by your spouse. There are no monetary restrictions on either per child or overall expenses of tuition fee with respect to any course, within the overall limit of Rs. 1 lac. The aggregate amount likely to be spent on this head can be estimated in advance at the time of beginning of the year.

Contribution to provident Fund: For those of you who are employed, this is also a mandatory item as your contribution for PF is deducted before the salary is paid to you. The amount of your contribution is based on your basic salary and you can work out the amount of your contribution likely to be made by you during the year ahead based on the salary slip received by you.

Life Insurance Premium: Here you add up your annual insurance premium of your life insurance policies be it term plan, ULIP or endowment plans. In case you are planning to take any additional insurance during the current year, please consider the premium you are likely to pay for the additional insurance. This way you will be able to work out the total insurance premium expected to be paid by you during the current financial year. Any premium paid by you on your life or on the life of your spouse or child is eligible for deduction under Section 80 C. However, the amount of insurance cover should at least be equal to or more than five times of the premium being paid by you. Moreover you are required to continue to pay the insurance premium for minimum of two years so as not to let the tax benefits already enjoyed lapse and become taxable in the subsequent year.

Repayment of principal amount of home loan: For finding out the amount of principle component, you can request your lender to provide you a provisional certificate of interest, which will have the figure of principle component in it. If you have taken a home loan from specified institutions, you can claim the tax benefits for the principle repayment component provided you already have taken possession of the house. You are required to hold the house property for a period of five years from the end of the financial year in which you had taken the possession, failing which the tax rebates allowed to you earlier, will become taxable in the year in which you sell such property. In case you have paid any stamp duty or registration charges in respect of such house, the same also needs to be taken into account.

Discretionary Items: For discretionary items you will have to make investments in various instruments if you want to take the full benefit of deduction of Rs. 1 lac available to you. This is dependent on the aggregate of the mandatory items. What you need to do is simply add up the tentative figure of all the mandatory items for the current year and deduct the sum of the same from Rs. 1 lac and the result is the amount which you need to invest in order to claim the full deduction.

As far as the mandatory items are concerned you do not have any option to choose from but for the balance figure you can exercise your option to choose from various items available. Under the discretionary category there are several items having different tenures. Primarily the discretionary category comprises bank FDs, PPF, NSC, ELSS and deposits under Senior citizen schemes. You can exercise the option based on your risk appetite, age and anticipated requirement of funds in the near future.

For senior citizens, the deposit under Senior Citizen Schemes or Bank fixed deposit for 5 years are appropriate. For a person who has started earning, has reasonably longer time horizon for investment and higher risk taking ability as well, the ELSS will work better. In terms of returns, ELSS scores over all other forms of investments eligible under Section 80C. But it has a lock-in period of  three years hence the gains made on redemption of these units will be long-term.

Moreover since the redemption attracts Security Transaction tax, the long-term capital gains on such scheme will be exempt from tax. Income in respect of other items of  investments like bank FD, NSC and Senior citizen deposit etc. are taxable so the effective after tax return earned is quite low than what is apparent.

As mentioned above, those who are young, have risk appetite with long-term investment horizon, they can invest the balance amount arrived as above in ELSS. Since we are at the beginning of the year, you can spread projected investment throughout the year by investing through SIP. With the help of investing in SIP, you are insulated from the volatility of the stock market.

With SIP in ELSS you are able to reap the benefit of rupee cost averaging concept. This rupee cost averaging ensures that you buy more of the same when the price is low and vice versa. This is the last chance for you to take the benefit of investing in equity while availing the tax benefits as  DTC proposes to discontinue the tax benefits in respect of ELSS.

As the goes the saying, “A stitch in time saves nine”.

So get  you act together and plan your investments for the purpose of Section 80 C benefits after taking into account the mandatory items. Listing of mandatory items will ensure that you do not land up investing more than what is needed so your cash flow is not unduly stressed.

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