How to choose between different tax-saving options

With many types of tax-saving instruments available for individuals, but the amount of investment allowed to avail exemption limited, one needs to plan well. Apart from non-tax factors — return on investment, flexibility to exit, recurring nature of investment, etc — the main tax considerations include tax impact not only at the time of investment, but also on future income and exit from the tax-saving scheme (commonly known as exempt at the time of contribution, exempt at the time of accumulation and exempt at the time of withdrawal).

 

One must look at the lock-in period for investment/exit and the quantum of general or specific limit for investment for tax savings. In the general category, where tax savings are available under Section 80C of the Income Tax Act, 1961, following instruments take a front seat as they are EEE schemes with relatively lower lock-in periods:

 

Equity Linked Savings Scheme is operated by various fund managers where the proceeds are invested in equity shares, with a lock-in of three years.

Employee Provident Fund is a common form of investment often chosen by employees with a minimum lock-in of five years. While the employer's contribution is exempt, investment by the employees is eligible for deduction.

Public Provident Fund is another option, in addition to EPF, where the contributions can be partly withdrawn after seven years and a full withdrawal is possible after 15 years.

 

Unit-linked insurance plans come with bundled benefit of both insurance and flexibility to manage the investment/return where the minimum maturity period would be around five years as the yearly premium cannot exceed 20% of the sum assured.

 

Life insurance has the primary intention of insurance with additional benefit of returns, though at a lower rate. The lock-in would depend on the specific scheme. As regards limits provided to certain types of instruments, additional savings for beyond R1 lakh can be availed by investing up to R20,000 under 80CCF in tax-saving infrastructure bonds. Moreover, R15,000 (R20,000 for senior citizens) is available under Section 80D for mediclaim insurance for self and dependents.

 

In addition, 10% of salary by way of employer contribution to New Pension Scheme under Section 80CCD is exempt, while the employee's contribution is included in the general limit of R1 lakh under Section 80C. Also, R1.5 lakh for interest on loan obtained for investment in self-occupied property (no limit if let out) provides tax exemption. Principal repayment, stamp duty and registration fee for purchase of property would be eligible under the general limit of R1 lakh under Section 80C.

 

While the above schemes are purely from a tax-saving perspective, a holistic view, considering the returns each scheme offers, would have to be considered. While the deadline for saving taxes for 2012-13 is fast approaching (March 31), one has to take out time to plan his taxes if not already done so.

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

1. ICICI Prudential Tax PlanInvest Online
2. HDFC TaxSaver Invest Online
3. DSP BlackRock Tax Saver Fund Invest Online
4. Reliance Tax Saver (ELSS) Fund Invest Online
5. Birla Sun Life Tax Relief '96 Invest Online
6. IDFC Tax Advantage (ELSS) Fund Invest Online
7. SBI Magnum Tax Gain Scheme 1993 Invest Online
8. Sundaram Tax Saver Invest Online
9. Edelweiss ELSS Invest Online
   
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