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Taxation Details

A last minute tax planning guide for salaried employees (Part 2)

Fintotal / Mumbai 18 Jan 13 | 08:35 AM

Investing/saving for tax benefits

Here is where you need to plan and act for managing your tax outgo. Broadly here you deal with the provisions of Sec 80C/Sec 80 CCC, 80G and 80 CCG. You are primarily expected to invest in any of the products listed in these sections and in return you get the benefit of paying lesser tax. But there is an upper limit to this. For both section 80C and section 80CCC the upper limit collectively is Rs 1,00,000.

Section 80C/ 80CCC:

In case the total amount claimed under 80C from the items that are listed in the above incidental category is totaling to Rs 1,00,000 then just relax. You have nothing much to do under these sections. But if total is less than Rs 1,00,000 then you can make some investments to claim tax benefits.

The products that qualify for th same are as follows:

Public provident fund
Bank fixed deposits (the 5 yr thing)
Mutual fund-ELSS
National Savings Certificate (NSC)
Pension Plan

Naturally your next question will be which product to choose. Here is our recommendation:

On closely looking at the products you will notice that all of them are long-term in nature. As it is a long-term investment, we need to take into consideration the negative impact of inflation while deciding on the product. Inflation robs the value of money as time passes. What a Rs 500 note can buy today cannot buy after say 5 years. Probably you need to have a Rs 1000 note! Hence whenever you make investments that are long-term in nature, the returns you earn necessarily should beat inflation.

Only growth assets have the power to beat inflation in the long run. Equities, equity mutual funds, gold and real estate have the power to beat inflation in the long run. Though they are riskier by nature, in the long run it delivers the best value.  Income assets like fixed deposits, bonds, traditional investment-cum insurance policies, etc gives returns less than inflation.

Arranging the section 80C products as per the asset class:

Income assets

Public provident fund
Bank fixed deposits (the 5 yr thing)
National Savings Certificate (NSC)

Growth assets

Pension Plan
Mutual fund-ELSS

It is now quite obvious that young and middle aged people should look at growth assets only. ELSS wins hands down over ULIPs since it has far lower costs and charges loaded onto it. This makes it one of the best tax saving instruments available.

What is ELSS?

An equity linked savings scheme (ELSS) is very similar to a diversified fund - it invests in the broad Indian equity market. It has no stated preference for sectors or themes – it chooses stocks based on the fund manager’s research and hypotheses. An ELSS has a three-year lock-in period.

Here’s how to choose (the rule of three):

Avoid funds that have less than three years of track record.
Avoid funds that have an asset base of less than Rs.300 crores. You can get this figure in the fund fact-sheet (available for download at the fund’s site)
Rank all ELSS in decreasing order of three-year returns. Choose one of the top three. Be aware, past performance may not be repeated in future.

Section 80G

If you pay a donation to any recognized charity or relief fund, a part of the donation can be claimed as a tax rebate. You need to submit the certificate of donation to HR.

A few organizations like the Prime Minister’s Disaster Fund enjoy 100% deduction – which means the entire donation paid is deductible from your salary. However, most other donations including several religious organizations enjoy only a 50% deduction. If you pay Rs. 1,000 to such an organization, you can claim Rs. 500 as benefit.

Section 80CCG

This is the newly announced rebate from the government called Rajiv Gandhi Equity Savings Scheme (RGESS).

Features are:

One can invest a maximum of Rs 50,000
Tax rebate of 50%
Only for individuals whose annual income is less than 10 lacs
Investing in stocks for the first time
Investing in BSE 100, CNX 100, PSUs, certain mutual funds and ETFs (list)
Lock in of 3 year but can trade after 1 year

There is not much clarity in term of execution and procedure. May be you can give it a miss this year or wait for few more weeks to get complete clarity.

Recap- here is the check list of documents you need to submit to your HR

In case you live in a rented apartment: 12 months rental receipt from owner
In case you have home loan: Statement of housing loan with details of principal and Interest components
Medical bills for the year if any
Tuition fee receipt paid for your children if any
Flight & train tickets for LTA claims
Insurance premium receipts paid for the year
NSC purchased in the year
Mutual fund (ELSS) statement
Mediclaim premium receipt
Parents’ mediclaim premium receipt
Education loan statement (mentioning the interest component)
Bank Fixed deposit receipts (the 5 year lock-in thing)

Be aware with the current crop of tax free bonds:  Firstly it has nothing to do with tax rebate of Sec 80 CCF. Section 80 CCF (Rs 20,000) has been scrapped this year and you will not get any tax rebate on infrastructure bonds like the one you got last year. Hence do not fall for this trap.

Click here for Part 1

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