Smart tax-saving solutions!

he new year begins with its share of resolutions.

But it will also bring the taxman to your door soon.

This is to remind you that the end of the financial year is fast approaching (March 31). And you had better have your investments in place if you want to reduce your tax outgoing.

Our purpose was not just to get you thinking. We will also tell you what your options are:

Get a grip on Section 88

Section 88 of the Income Tax Act, 1961, is one of the most popular sections.

The reason: Investments covered under it offer a rebate.

A rebate is when the government gives you a concession on your income.

The actual amount of the rebate varies:

• If your gross total income does not exceed Rs 150,000, you will get a 20% rebate.
• If your gross total income exceeds Rs 150,000, you will get a 15% rebate.
• If your gross total income exceeds Rs 500,000, Section 88 will not be applicable.

Say you have to pay Rs 18,000 as tax, and you are entitled to a rebate of 20%.

You invest Rs 50,000 in the instruments eligible for a rebate. That means you save Rs 10,000 of your tax (20% of Rs 50,000).

So instead of paying tax of Rs 18,000, you pay a tax of Rs 8,000.

The maximum amount that can be invested under Section 88 is Rs 100,000. In other words, the maximum tax that can be saved is upto Rs 20,000.

Also, the limit of Rs 100,000 has several sub-caps (mentioned below) for different investment products. The investments that fall under this section qualify for a maximum investment of Rs 70,000. Infrastructure bonds claim the balance 30% (Rs 30,000).

Or you could invest the entire Rs 100,000 in infrastructure bonds.

Mutual Funds -- ELSS

Equity-linked saving schemes are basically equity funds (funds that invest a major portion of their assets in the stock market) with a tax benefit. They have the potential to give a high return but are also risky.

• Maximum investment: Rs 10,000.
• Lock-in period: Three years.
• Return: Not fixed. Dividends and appreciation in NAV. Both are tax free.

Mutual Funds -- TIPP

The Templeton India Pension Plan is a balanced fund. This means up to 40% of the money is invested in equity and the rest in debt (fixed income instruments).

• Maximum investment: No cap but the tax benefit will only avail upto an investment of Rs 70,000.
• Lock-in period: Three years.
• Return: Not fixed. Dividends and appreciation in the net asset value (NAV). This is the cost of a unit of a fund. Both are tax free.

Small saving schemes -- PPF

The Public Provident Fund stands next to none in terms of safety and tax benefits.

• Maximum investment: Rs 70,000 per annum.
• Lock-in period: 15 years from the date of inception. Partial withdrawals are permitted after the seventh year.
• Return: 8% per annum tax free.

Small saving schemes -- NSC

The National Savings Certificate has a fairly large fan following.

While the interest is taxable, a deduction can be claimed under Section 80L. Under this Section, interest in certain investments can be exempt from tax upto Rs 15,000.

• Maximum investment: No cap but the benefit will only avail upto Rs 70,000.
• Lock-in period: Six years.
• Return: 8% taxable.

Infrastructure Bonds -- IDBI/ ICICI Bank

Financial institutions like IDBI and ICICI Bank come out with bonds that also have a tax benefit under Section 88. IDBI currently has an issue open and ICICI Bank will be coming out with one by the end of this month.

Though the interest is taxable, you can claim exemption from tax to the tune of Rs 15,000 under Section 80L. It is advisable to opt for the interest on a yearly basis (to be within the Rs 15,000 limit).

If you decide to go for the cumulative option, where you get it all at one go (a lumpsum at maturity), your interest earnings that year may exceed the limit.

• Maximum investment: Rs 100,000 lakh to avail of the tax benefit.
• Lock-in period: Three years.
• Return: 5% to 6%. When the tax break is taken into account, it works out to 8.7% to 11.71%. Interest is taxable.

Life insurance schemes

Calamities like the Gujarat earthquake and the more recent tsunami tragedy have forced people to re-look at insurance. When buying insurance, keep one thing in mind: Look to maximise your cover, not returns.

• Maximum investment: It all depends on the terms of the policy. The total premium paid has to be within the Rs 70,000 limit of rebate under Section 88.
• Lock-in period: Depends on the scheme opted for.
• Return: Depends on the policy being purchased and the tenure you opt for.

To help you make your choice, we suggest LIC's Jeevan Rekha.

This policy is a unique whole-life-cum-money-back policy. In this policy:

• You get a guaranteed return (10% of sum assured) every five years. This return is tax free.
• On death, the entire amount is given to the beneficiary (tax free).
• You get a guaranteed risk cover for life.
• If you enter young, you get it really cheap.

In short, a winner all the way!

But remember that this is a general analysis. And the final choice should be made only after taking professional help.

Medical Insurance Schemes (Section 80 D)

Even if you are happy that your employer covers your medical expenses, please revisit this aspect.

It is possible that you may change jobs and may be between jobs for some time, keeping your medical position open.

This definitely requires you to avail of medical insurance from third party insurance companies to cover this risk even if you do have coverage from your employer.

Medical premium payment is covered as deduction from your gross total income, hence knocking of that much income from being taxed. What this means is that the premium paid for towards the mediclaim policy is deducted from the income directly.

So first your gross total income is calculated. Then this amount is deducted, to finally arrive at the next taxable income.

The maximum amount of premium paid to be considered for deduction is Rs 10,000. And in the case of a senior citizen (above 65 years of age) in the family, the maximum amount eligible is Rs 15,000.

• Maximum investment: Depends on the cover you want and need.
• Lock-in period: Premium paid on yearly basis. Policy would be live till premium is paid.
• Return: Coverage of the entire medical expense risk.

Pension Plans (Section 80 CCC)

This is a must in every portfolio -- it enforces disciplined investing for a prolonged period of time thereby allowing the power of compounding to work its magic.

Also it is one of the few tax saving avenues available for people in the high networth bracket.

But remember that the tax saving in a pension plan is mere deferment of taxes -- when you receive the pension later, the same would be taxable.

There are several plans available today, especially the unit-linked ones offered by the private operators. These plans offer a lot of flexibility and can be tailored to suit your risk-return appetite.

Just as you pay medical premiums, the same working principle applies: the investment you make in a pension plan makes you eligible for deduction from your gross total income.

• Maximum investment: There is no specific cap, but tax deduction is available for maximum investment of Rs 10,000.
• Lock-in period: Funds cannot be withdrawn till one attains the age of 50.
• Return: Performance not guaranteed. Pension received is fully taxable.

DON'T MISS!
• IDBI Tax Saving Bonds
• How is your tax calculated?
• How to get a PAN
• Why you need a PAN

Relax With Tax is a Mumbai-based personal tax & finance solutions provider.

Illustration: Rajesh Karkera