Link your tax planning to financial goals
Well known as JFM (January, February and March) in the banking industry, the quarter in which relationship managers from banks, insurance companies and other distributors approach you with investment products that qualify for tax benefits is here.business Updated: Jan 10, 2011 23:59 IST
Well known as JFM (January, February and March) in the banking industry, the quarter in which relationship managers from banks, insurance companies and other distributors approach you with investment products that qualify for tax benefits is here. However, while tax saving should not be taken up as a crisis management towards the end of the financial year, we would advise you to go for a financial product that offers you tax benefit while helping you achieve your financial goal.
How does one go about it?
Ideally, one’s investment for tax savings should start at the beginning of the financial year. For example, if you know that you have to invest Rs50,000 in tax saving equity linked savings schemes (ELSS) of mutual funds, then rather than invest towards the end of the financial year, go for a systematic investment plan (SIP) that begins in April and ends in March. While the burden of saving for tax investment gets reduced, you also manage to generate a decent return on your investment.
Experts say that taxation benefits should not drive your investment decisions. Rather, tax planning should be in the broader framework of your financial goals.
“If you require a higher rate of return and have the ability to take risk then you should go with equity products and in case you are conservative and do not want to take risk, go for debt products that qualify for tax benefits,” said Amar Pandit, a Mumbai based financial planner. “Thus, taxation should not be a consideration to drive your investment but your desired goals.”
How much can you save on taxes this year from your taxable income?
Under Section 80C of the Income Tax Act, one can claim tax benefits of up to R100,000 by investing in financial instruments such as the Public Provident Fund, National Savings Certificiates, ELSS from mutual funds, insurance policy premia (including unit-linked insurance plans), repayment of principal amounts on home loans and fixed deposits that offer tax benefits.
In the currrent financial year, the government is also allowing an additional tax benefit on investments of up to R20,000 made in infrastructure bonds.
Other than this, you can claim an additional benefit on interest payment of up to R150,000 towards home loans and on the full interest paid in case you are earning a rental income on a property for which a loan has been taken.
So what should you keep in mind?
Before going in for a tax saving instrument this year, check for its eligibility for tax benefits going forward as there are certain major changes in the kind of products that will qualify for tax benefits beginning the financial year 2012-13 when the Direct Tax Code code becomes applicable.
“Certain instruments such as—unit linked insurance plans, traditional insurance plans (except pure products), equity linked savings schemes (ELSS) and their reinvested dividends—would not qualify for tax benefits beginning April 2012 and hence investors should keep it in mind before investing in such instruments,” said Vishal Dhawan, a Mumbai-based financial planner.
If you lock yourself in a five-year unit-linked insurance plan (Ulip) for the sake of tax saving, reconsider your move because all investments done into the product from the third year (April 2012) will not qualify for tax benefits.
Beginning April, 2012 when the Direct Tax Code (DTC) becomes applicable, it will change the way you save on taxes under Section 80C. Only few investment avenues will qualify under this exemption— such as the Provident Fund, superannuation funds, gratuity payments and contributions to the New Pension System. Additional benefits of up to R50,000 will be available on investments in pure insurance products. However, benefits from interest payments on home loans under section 24 (b) will still be there.