2012: Smart ways to save tax & take advantage of DTC
Over the next 90 days, millions of Indian taxpayers will wrap up their tax planning for 2011-12. Unlike in the past, this year's tax planning will be quite different as not only have the rules changed, but many of the goal posts have also shifted.
The biggest change is that the favourite tax-saving instrument of risk-averse investors has now become market-linked. The Public Provident Fund (PPF) will give returns that are 25 basis points above the benchmark yield of the 10-year government bond.
Then there is the Direct Taxes Code that may come into effect from April this year. There is also a small, but significant, change for senior citizens.
Last year's budget lowered the age limit for senior citizen taxpayers from 65 to 60. It also introduced a new category of very senior citizens above 80 with a big exemption of Rs 5 lakh. Despite these alterations, some fundamental principles of tax planning remain unchanged.
Your tax planning should still be guided by your overall financial planning. "Don't go by advertisements because not all tax-saving investments will suit you.”
Your choice of instruments should depend on how soon you need the money, your expectations of returns and ability to take risk. Let us look at the instruments that different types of investors should have in their tax-saving portfolio this year.
Take the ELSS advantage: For the taxpayers who embraced market risk by investing in equity-linked savings schemes (ELSS), this may be the last year for investing in this category. The DTC has not included ELSS in the list of tax-saving options. These funds have the shortest lock-in period of three years among all Section 80C instruments. So, your funds are not tied up for five years as in fixed deposits (FDs) and National Savings Certificates (NSCs).
"Given the three-year lock-in period and the level at which the markets are now, it is unlikely that an investor will lose money by investing in ELSS," says financial consultant Surya Bhatia. The low minimum investment in these funds (you can start with as little as Rs 500) makes them an ideal stepping stone for the rookie investor.
However, don't forget that ELSS funds can be risky. So invest systematically rather than in a lump sum. Remember, you have to invest the money before 31 March.
"There is a lot of uncertainty in the market now and it is best to exercise caution and stagger investments in ELSS funds," says Ajit Menon, executive vice-president and head of sales and marketing, DSP BlackRock Mutual Fund.
Investors can also opt for equity exposure through Ulips. Unlike ELSS funds that cannot be touched during the lock-in period, these insurance-cum-investment plans allow policyholders to tweak the equity and debt allocation according to the market conditions. The New Pension Scheme also gives equity exposure, but this is limited to a maximum of 50% of the corpus.
Save extra Rs 9,270 through the PPF this year: The overall limit for investing in the PPF has been raised to Rs 1 lakh now from Rs 70,000 earlier. For someone in the highest tax bracket, this enhanced limit of Rs 30,000 means a potential tax saving of Rs 9,270 a year. "By itself, the PPF is a good long-term investment option, even if it is not done because of tax planning,".
Lock into tax-saving FDs at high rates: For the taxpayers who shy from market risk, fiveyear FDs are the only remaining true fixed income tax-saving instrument.
Even long-time favourites, such as the PPF and NSCs, have become market-linked. Even if the 5-year benchmark bond yield moves up to 9%, NSCs will offer an interest rate of 9.25%. Banks are already offering higher rates of 9-9.5%. For senior citizens, the Senior Citizens' Savings Scheme has become a little attractive.
It will offer an interest rate of 100 basis points above the 5-year government bond yield. But again, tax-saving FDs appear a better bet because banks offer senior citizens a 25-50 basis points higher rate of interest. Be careful with insurance:
For those who flocked to Ulips and insurance policies, there is uncertainty looming on the horizon in the form of the DTC. Under the DTC, insurance plans that don't give a life cover of at least 20 times the annual premium will not be eligible for deduction.
While the DTC is yet to be passed, there is no clarity for now on the new rules for tax deduction and taxability of insurance income.
These are among the various issues you will need to grapple with when you decide your Section 80C mix for this year. An early start allows you to make an informed decision. Leave everything for the last few weeks of the financial year and you are likely to make a suboptimal choice in your hurry to beat the 31 March deadline.
Source: Economic Times
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