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How to choose the right tax-saving investments

Last updated on: January 20, 2010 10:21 IST

It's the tax season again when we feel confused, frustrated and helpless. There are so many scurries as the due date to filing returns comes closer. Most of us don't even think twice whether the asset we purchased fulfills our needs or not.

We blindly sing along with the agent's advice. Adding to this confusion is the vast collection of different products with similar names and similar products with dissimilar names. And then there's one more cumbersome task: that of actually filing tax returns.

All this makes one feel overworked and over worried by the busy month of March. If you are one of the many people feeling the same way, then you have come to the right place.

This article will help you to choose the right ones for you. And what better time than now! After all you must invest by March 31, 2010 to avail the benefits.

Click NEXT to read how you should assess your tax liabilities.

Chat, 2 pm: Smart investment tips to save tax

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Check your tax liability

Last updated on: January 20, 2010 10:21 IST

First, do a review of your tax liability to ascertain what and how much.

You actually need to save as much tax as legally possible. It may be quite possible that the life insurance premiums that you are paying along with the PF deductions may be enough to take care of tax saving!

Overview of tax saving options

Very simply there are three basic sections under which you can save on tax:

1) Section 80C, inclusive of Section 80 CCC

2) Section 80D

3) Section 24(b)

Section 80C: Investments in the following up to a limit of Rs 1,00,000 are deductible from your taxable income:

1. Life insurance premium payments

2. Contributions to employees provident fund

3. Public provident fund (maximum Rs 70,000 in a year)

4. National saving certificates (NSCs)

5. Unit linked insurance plan (ULIP)

6. Repayment of housing loan (Principal)

7. Equity linked mutual fund scheme (ELSS)

8. Tuition fees including admission fees or college fees paid for full-time education of any two children of the assessee (Any development fees or donation or payment of similar nature shall not be eligible for deduction).

9. Infrastructure bonds issued by institutions/ banks such as IDBI, ICICI, REC, PFC etc.

10. Tax-saving fixed deposits (FDs) of scheduled banks with tenure of five years are also entitled for section 80C deduction (investments in a 5-year post office time deposit (POTD) scheme are included)

11. Senior citizen savings scheme 2004 (SCSS)

Chat, 2 pm: Smart investment tips to save tax

Section 80D

Last updated on: January 20, 2010 10:21 IST

You can claim a deduction of Rs 15,000 (Rs 20,000 in case of senior citizens) for medical or health insurance -- popularly known as mediclaim policy -- premia paid on your health, spouse and dependent children.

Additionally, (from April 1, 2008) you're also allowed a further deduction of Rs 15,000 for buying health insurance policy for your parents (Rs 20,000 if either of your parents is a senior citizen)

Section 24(b)

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of a self-occupied house.

The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

Chat, 2 pm: Smart investment tips to save tax

Know your requirements

Last updated on: January 20, 2010 10:21 IST

Choosing the right tax savings product for you is concluded in two simple steps:

Step 1: Know your requirements

Step 2: Choose the products that best fits your needs

We agree it is easier said than done. However, every decision we make in life metaphorically revolves around what you really want. It's not different for tax savings. Today's population has choices in savings and investment like never before. There are as many financial products (some repetitive) in the market today as there are stars in the galaxy. Knowing what you really want makes it easier to choose from the plethora of products and save on taxes too.

To figure out your requirements, identify your life cycle stage. Breaking it down to simpler steps, the difference between where you are today (financially) and where you want to go tomorrow determines your requirements/needs.

Young and single

You may want to provide funds for dependants (such as parents) in case of an unfortunate event, such as the passing of one of them or yourself if you are the earner and taking care of them. You will require life insurance for such.

You will need to have adequate funds for yourself in the case of accident, disease, disability or illness. For this you need an emergency fund which could be in a liquid short term fund.

You will want to accumulate funds for short/medium term needs (such as buying a house, car, marriage, giving to charity etc). This could be in short term liquid funds, savings accounts, laddered FDs, or mutual funds (if the event when the money is needed at least 3-5 years from now).

Accumulating funds for long term needs (such as retirement) is important whenever you start to earn. For this you will want a combination of pension plans, provident fund, and mutual funds of equity and debt. ELSS are a good idea as they provide tax benefits and make good long term investments.

Young and married

In addition to what we already discussed, and which remains important (see list below), you will have new priorities.

You still may need:

Protection for your parents
Emergency funds
Short/Medium term goals saving
Long term/retirement savings

In this stage you will want to provide protection for numerous dependents who could include your parents and now your children and spouse as well, in case something happened to you, the earner, on which these people depend. This stage of life is your highest need for life insurance.

Your short/medium term goals will be changing over time from cars, your marriage and holiday to your child's education, children's marriage and house purchase, if not already done.

Married (not so young anymore) with older children

At this stage, all of the above still apply, but retirement planning begins to take priority. As hard as it may be for parents to understand, at this stage, if you have not properly prepared for your retirement, you should prioritise this over children's education and marriage, encouraging children to help out more in this area by saving themselves and taking loans.

You still may need:

Protection for parents
Emergency funds
Short/Medium term goals saving
Long term/retirement savings

Chat, 2 pm: Smart investment tips to save tax

Pre-retirement

Last updated on: January 20, 2010 10:21 IST

Your children should have started working by now. Life insurance becomes less of a priority except for one's spouse who may require protection if he/she does not work. Retirement funds are a top priority, as mentioned above. Now you need to get your ducks in a row and prepare for a new stage of life. Financial planning is critical to make sure you are ready.

You still may need:

Emergency funds
Short/Medium term goals saving (this would become retirement)
Long term/retirement savings (still need to plan on retirement being long)
Focus on income-producing investment products (see next stage)

Retirement

In retirement, income products become ultra-important, such as dividend paying shares or mutual funds, pension plans and post office schemes. Pensions and provident funds may be providing payout at this point. Some long term growth investments must be retained as people are living long lives these days and inflation must be outpaced.

Protection of capital is the key

For those widowed or divorced, the same needs will likely apply.

You still may need:

Emergency fund
Short/Medium term goals saving (this would become retirement)
Long term/retirement savings (still need to plan on retirement being long)
Focus on income-producing investment products

When to review?

The asset allocation should be reviewed whenever there is a change in the life cycle stage. There may be overlapping of life cycle stage. For example, a person who is young and unmarried may opt to purchase a home loan and therefore can avail of the benefits under sec 80C. The individual has to carefully choose the investment that best suits his financial as well as liquidity needs and savings is inflation protected.

The tax season need not be arduous and tiresome. Use it as a time to review your goals and make sure your financial plan is on the right track.

Chat, 2 pm: Smart investment tips to save tax