Best Tax Savings Options for FY 2011-2012!

              The  current financial year will come to an end within five months time.  Its already late to plan for your tax savings for the current financial year.  This article is mainly intended for those who are not yet started investing for tax savings purpose.   There are many sections of Income Tax Act that enable individuals to save tax by investing in various qualified instruments. It's time for investors to review their investments in tax-saving instruments and look at possibilities to save maximum possible tax in the current financial year.

  Under Section 80C of the Income Tax Act

Section 80C of the Income Tax Act allows income tax exemptions to individuals on investments in certain qualified instruments. The maximum limit to claim deduction under this Section is Rs 1, 00,000. You can invest Rs 1,00,000 in one or more of these instruments to avail tax rebate.  The amount invested in the qualified instruments will be deducted from your total income.  So finally you end up paying tax only for the net amount after deduction of the money invested in those qualified financial instruments.

              You can reduce your tax liabilities by way of investing any of the following instruments

1)                  Employee Provident Fund

2)                  PPF – Public Provident Fund (Maximum limit per financial year Rs. 70,000)

3)                 Life insurance (term insurance as well as endowment plans)

4)                 Pension plans

5)                Equity-linked Savings Schemes (ELSS) of mutual funds  (three year lock-in period)

6)                 Bank Term Deposits (special deposits for tax savings purposes – lock in period applicable)

7)                Specified government infrastructure bonds

8)                Repayment of housing loan principal repayment

9)              National Savings Certificates (NSC) and interest accruals on previous years' NSCs can also be added to the Section 80C limit

Infrastructure bonds


You can invest in specified long-term infrastructure bonds to claim a deduction up to Rs 20,000. The tax rebate for infrastructure bonds is in addition to Section 80C.  (Lot of companies both Government and private sectors are planning to launch their long term infrastructure bonds during the month of Nov-Dec, 2011.  Presently PFC, IFCI infrastructure bonds are on tap, in case you are patient enough to wait for another month you may likely to get more interest from the coming infrastructure bond issues.  )

Housing  loan – tax benefits


Housing loans provide tax relief. The principal repayment of a housing loan attracts rebate under Section 80C up to Rs 1,00,000 and the interest payment attracts a rebate of Rs 1,50,000.

Medical insurance


In addition to Section 80C, there is Section 80D that enables an individual to claim rebate on mediclaim policies. Payment of premium for medical insurance (mediclaim) is eligible for tax exemption up to Rs 15,000  This deduction can avail on medical insurance premium paid for yourself, spouse, parents and children.




Other deductions for salaried employees


If your employer provides medical allowance, you can available an income tax deduction of up to Rs 15,000 per year by offering proof of the relevant expenses.


If the employer gives leave travel allowance as a part of your salary, you can avail income tax deduction on travel expenses (family travel expenses can also be covered if family travels along with the taxpayer). Leave travel allowance can be availed twice in a block of four calendar years. Presently, the block applicable is from 2010 to 2013. Leave travel allowance can only be availed on the expenses incurred on domestic travel. However, the travel mode can be anything like taxi, bus, train or air.

Conclusion


Since only five months are left out for completing this financial year,  it is advisable for you to review your tax savings  planning, and explore available options to minimize the tax liabilities.


Please keep the following factors in your mind while proceeding with tax saving investments.

              First of all, try to exhaust the quota for Section 80C. You can look at various options to invest and save tax under Section 80C. Salaried people can also look at saving tax by planning the expenditures under medical allowance, child education allowance and conveyance allowance. Investing in a medical insurance policy is another option to save tax, if your Section 80C limit is already exhausted. However, it is not advisable to take another medical policy just for the sake of saving tax, if you already have one.

Tips for Financial Planning & Investments

1)     Don’t invest in any financial products without understanding the actual return potential and risk aspects of the product you are planning to invest in.  Read the fine prints carefully, try to understand, make a comparative study with the similar products available in the market.  Do not invest at seeing colorful and attractive advertisements, leaflets etc.  Also, please careful about the brand ambassadors, suppose your favorite celebrity acting as brand ambassador for that company, that doesn’t mean that, the product he promoting is good to buy.  His intention is to make cores and cores of money and he does not bother about whether the end user is going to benefit out of it or not.   In case you find it difficult to understand the products, take the help of an expert finacial planner.     Keep this in your mind that, the money you are going to invest is your hard earned money and the investment is going to be made with the expectation of earning a reasonable return without risking the original amount invested.

2)     Track your portfolio/investments regularly, review each and every products in your portfolios on a regular interval, if you feel that, some of the investments are not giving returns as per your expectation or in line with the similar products available in market.  Watch the performance for one or two quarter, still its not improving or showing the sign of improvement remove those investments from your portfolio and look for a better investment option.

3)     Keep this in mind that, the return of any investment is not what actually get credited in your bank account or interest/dividend cheque you received from the company or bank. The actual return is what you get in hand after paying the taxes (income tax, capital gain tax etc) and also you need to adjust inflation factor.  So the actual return should be net of taxes and cost inflation factor.  Eg.  You are earning 10% interest on your bank fixed deposits and present cost inflation is 8%, in this case the inflation adjusted return is only 2%.   When you make investments, if possible select investments whose returns are tax free or exempted from capital gain tax.

4)     In case you wanted to beat inflation, you need to invest in high risk high return assetslike equiteis or real estate. The traditional bank term deposits, company deposits, Post Office MIS etc can maximum provide you a return in the range of 8-12%,  when you adjust the inflation factor, your actual return may be much less or even some times negative.  So, start investing some amount (depends up on the risk and return appetite of the investor) in equity market,mutual funds or similar investment products.  On medium to long terms basis, those investment are capable of beating the inflation.  A wise investor can earn a return in the range of 12% -15% from these types of investments in the long term.

5)     For protecting yourself and your family for the money required for the treatment of any illness, take a mediclaim health insurance policy form one of the trusted insurance companies.  This will protect your family for any extra amount required for the treatment of your family members and you are not required to liquidate your existing investments or take a loan from a bank or money lender, this is basically not an investment option but this will act as an insurance or protection of your investment. 

6)     In case you are not an expert in stock market investments, its better to investment in good performing Mutual Fund schemes rather than direct investment in stock markets.  The expert fund managers in the asset management company will take care your investments and do the needful by way of selecting, buying and selling of securities on behalf of the unit holders of the mutual fund schemes you have invested for.

7)     In case your risk appetite is low, try to use the Systematic Investment Plan (SIP)route of investments for both Mutual Funds and Equity investments.  This will average your cost of investments, enhance the return potential and reduce the risk of losing your capital. Do not stopyour investments like Mutual Fund SIPs or insurance policy premium just because the stock market is down. You behave like an intelligent investor when you start investments and become genius when you see correction in the market. You start saying "market will surely go down further." It's better to invest more when all others are selling. This is the ONLY way to make friendship with stock market

8)     If you are planning to invest in stock market directly, invest with strict stop-loss and aim for target price.  Once that target is achieved or the prices come down to a certain level, go and sell your shares to limit the loss or book the profit.  If you are over confident or sure about the performance of the security, you can hold those securities absolutely at your personal risk.   Before selecting a stock for investment, study the fundamentals of sector, company, management of company and technical charts etc.  Stock market is like a magnet, be careful.

9)     Always take term insurance policiesto cover your life risk.  It won't give you anything at maturity but will surely take care your family, in case of your sudden death. Your wife will not try to seek a job at older age as she has sufficient funds to manage all responsibilities.  Don’t consider buying insurance products as investments, it’s a protection against any future eventuality of any unexpected events like death, illness or disability etc.  

10)  Always think positively and take investment decisions rationally.   Don’t trust the investment/insurance products selling agents (either individuals or corporate). Most of their aim is to make money and they are not bothered about your financial wellbeing (don’t think that, all financial products selling agents are like that, there are exceptions too) It is you to decide, whether your agent or financial adviser is doing justice to your investment or they are keenly interestedin your financial wellbeing rather than earning their share of commission. 

Best Regards
Mani.V
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