Begin early to make the most of all tax shelters

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Vaibhav Sankla, H&R Block

While the world celebrates the New Year on 1st January; when it comes to the world of finance the financial year begins in April. The beginning of the financial year is the best time to plan your investments and strike a balance between not only risks and returns but also in terms of your outlay and the tax benefits you stand to gain. Of course the best course of action would be to invest in schemes that are low risk, do not require large fund outlays and at the same time give you high tax benefits. Some of the investments that should help you reach your objectives are:

Public Provident Fund (PPF)

The public provident fund provides a good rate of return and is also perfect for saving for retirement. It is listed under the EEE (exempt-exempt-exempt) taxation regime which means that accumulations and interest on maturity will be exempt from taxation. The amount you can invest every year has been increased to Rs 1.5 lakh. There is however a lock-in period of 15 years; loans against PPF account can also be sanctioned. The returns from this investment have recently been slashed since these are now linked to market conditions and these will be notified each quarter. This is also an advantage in some ways since this will also pay more returns when the market rates increase.

Term deposits

Deposits like the NSCs – National Savings Certificates and other term deposits with scheduled bank or the post office also provide for tax deduction. These have a lock in period of a minimum 5 years and offer guaranteed returns on maturity. Bear in mind that the interest earned would be taxable as would the premature withdrawal of the term deposit with the post office. Interest rates here are also market linked now.

Life insurance premium

Another investment avenue that gives you guaranteed returns is life insurance. In addition it also provides risk cover to you and your family. Under section 80C one gets tax exemption on the premium payments. If the premium paid per year for the policy duration is less than 10% of the assured sum, then the amount received on maturity is exempted from tax deduction.

Medical or health insurance

Given the rising cost of healthcare, medical insurance is actually a must. The amount of cover is something you need to consider. The tax benefits of medical insurance are many. Premiums paid up to Rs 25,000 to keep in force mediclaim policies for yourself, your spouse and children are eligible for deduction. Further deduction of Rs 25,000 is available for medical insurance premium paid for parents. The limit of Rs 25,000 gets enhanced to Rs 30,000 if the policy is for a senior citizen/very senior citizen. But to avail of these tax benefits the premiums have to be paid by cheque or card; cash payments will not be eligible. Moreover the person paying the premiums should be less than 65 years old. The above limits also include expenses incurred for preventive health check-ups up to Rs 5,000. In addition there are provisos which allow you to claim exemption even on expenses you incur on medical treatment. Medical treatment expenses of up to Rs 30,000 can be claimed as an exemption by super senior citizens above the age of 80 years.

Equity Linked Savings Scheme (ELSS)

These are the types of mutual fund which are equity-oriented and the returns on these are tax free. Yet, the lock in period for the scheme is just 3 years. A further advantage is that being equity linked they have the potential for higher returns than standard fixed deposits, but at the same time they do also have a higher element of risk. The investment limit in Section 80 C for higher tax benefits has been increased to Rs 1.5 lakh.

Tax Free Bonds

A long-term saving option is tax free bonds or debt securities issued by public sector units. The risk factor is reduced with bonds that have AA and AAA credit ratings. But the benefits from these will only accrue after completing the lock-in period.

New Pension Scheme (NPS)

While this was initially open to only government employees, from 2009, it was extended to all Indian citizens. Further, the last budget has introduced an additional income tax deduction of Rs. 50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD. As per the scheme, subscribers invest in a fund chosen by them and at the time of retirement they get a lump sum amount depending on the performance of that fund. However, investors need to be aware that as the returns are market linked there are no guarantees from NPS.

Other Deductions You Are Eligible For

In addition to the above schemes and investment avenues which you could invest in to save on tax, there are other deductions that you could be eligible for and probably not even aware of, these include:

• Deductions pertaining to dependent individuals, who are differently abled and therefore wholly dependent on the individual for support and maintenance.

• Deductions are allowed for medical expenses incurred for a dependent, when that individual is being treated for a listed disease.

• Deductions on interest, not principal amount, on education loan when taken from a financial institutions or approved charitable institutions. There is no maximum limit for interest deduction. However this deduction can be claimed only for 8 years from the year in which you start claiming this deduction.

• Deductions on donations to approved charitable funds like the Prime Minister’s Relief Fund, trusts, and charitable institutions are eligible for tax deduction. A wise adage advocates, ‘no time like the present’ and this holds true for planning your portfolio too. Start early so you have enough time to tweak your investment outlay if required and when it comes to year closing you should be pleased to see not only your money grow but also your taxes getting deducted.