Wednesday, Sep 28, 2022

From taxpayer to taxsaver

If the exact tax liability and related provisions are not clear,one may end up buying a product which may become burden on the portfolio in the long term,says Ritu Kant Ojha

As soon as the tax season hits,there is a flood of aggressive advertisements by different categories of tax saving instruments. Suddenly your personal banker would start calling you more frequently suggesting you ways of “smart” tax saving. The sales team of various financial institutions are under pressure to make the most of the tax planning season.

It is times like these when there are maximum chances of going wrong in managing your finances and end up investing in a product that would prove to be quite painful in the long run. The misselling by the agents to garner higher commissions cannot be ruled out too. It is not difficult to protect oneself from their hard selling techniques. A little attention to the actual investment requirement for tax planning would help avoid making mistakes and going overboard. Here are some tips.

Assess tax liability

Form 16 is the most important document to understand the tax liability for the current financial year and how much tax you would be able to save. Take out all the receipts/copies and other related documents of insurance premiums paid,tuition fee paid for the children’s school,health insurance premium paid for self,spouse,children or parents,housing loan-both principal and interest component,contribution to Public Provident Fund (PPF),investments into equity linked saving schemes (ELSS) by mutual fund companies,rent receipts,employee provident fund,and five year fixed deposits.

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Once you have all the documents in hand,write down contributions made under each head and do your calculations. Section 80C allows deductions up to Rs one lakh on contributions made under PPF,life insurance premiums,principal on housing loan,tuition fees,ELSS,EPF,and five year FDs. It is important to have all documents and receipts in place as a copy of the original needs to be deposited with the employer to avail tax deduction.

In case of any confusion one must seek clarification with the respective accounts department so that exact tax liability is clear. One needs to plan only for the amount left after deducting the above amount from Rs one lakh,under section 80C.

DTC impact

If Direct Tax Code is implemented from next financial year,in the proposed format,there would not be any tax benefits on fixed deposits,insurance plans with return component like ULIPs,and equity linked savings schemes. While investing in an investment product of an insurance company it would be prudent to keep the possible changes in the tax regulations as the lock-in period is five years now.

However,some of the top ELSS funds have given high returns in the past and this may be the last opportunity to invest in them. “Only three year lock-in period makes them an attractive investment option. Those who still have some window to invest under 80C must tap this opportunity”,suggests Suresh Sadagopan,a Mumbai based financial planner.

Other options


Apart from Section 80C,health insurance premiums are available for tax deductions under Section 80D. R 15,000 for self,spouse and children and additional R 15,000 is available for parents. If you are paying a housing loan,tax deductions up to R 1,50,000 is available on interest paid on housing loan under Section 24. Remember to keep all your rent receipts as the rental for self accommodation is available for tax deduction under House Rent Allowance (HRA).

Donations made to some specified institutions are eligible for tax deductions under Section 80G. Do remember to keep the proper receipt to avail tax benefit. Under Section 80E,interest paid on loan taken for higher education for self,spouse or children is available for tax deduction.

Additional tax deduction up to Rs 20,000 can be availed on investment into infrastructure bonds under Section 80CCF. The benefit is maximum for those in the highest tax bracket.

New products


January,February and March (known as J-F-M period in the insurance and mutual fund parlance) see several launches of tax saving products. There is no doubt that these products would provide benefits of tax deduction but the cost one pays for such a benefit needs to be assessed.

For example,an insurance company recently launched a tax saving product that claims to provide R 5 lakh cover plus guaranteed return of R 1.9 lakh (almost double) over a period of 10 years with a one-time contribution of R one lakh. While it may look to be an attractive option at the outset,the annualised return comes down to mere 7.2 per cent. Products like PPF,FDs and debt funds could give a better return. As far as life insurance component is concerned,an adequate term insurance should be enough.

Even new fund offers of ELSS may be avoided. There already exist ELSS funds that have a good track record which can be chosen over new launches.

Tax planning

“Most of the people do not understand the exact tax liability and end up buying expensive products. If you cannot do it yourself,it is better to take help of a professional rather than get trapped in a bad product”,suggests Kartik Jhaveri,Director,Transcend Consulting.

Planning one’s tax may seem to be a tedious job but a little attention and some time devotion would help align it with overall financial planning. For example,a term insurance is part of buying life cover as well as tax savings; ELSS provides tax benefit along with exposure to equity; health insurance provides health cover as well as saves some tax etc. So become tax smart this year and do not get fooled by high pitch advertisements.

First published on: 09-01-2012 at 03:53:35 am
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