Yet to plan taxes? Read this

We got a mail from a reader asking us if infrastructure bonds were included under Section 80C and if there were any issues in the market currently.

Another wanted to know if he could include the five year bank deposit since it was included under Section 80C in this Budget.

This article is for those of you who have still not yet done your tax planning for the financial year April 1, 2005 – March 31, 2006.

To begin with, the recommendations in the Budget are not for this financial year but for the next financial year. Do not take into account what the finance minister has said if you are doing your tax planning for the year ending March 31, 2006.

Instead, here's what you can do.

The Rs 1,00,000 limit

Section 80C has a limit of Rs 1,00,000. You need to find out how much of this limit you have already used up.

1. Check your EPF contribution

A percentage of your salary is deducted by your employer towards the Employee Provident Fund.

Since this is done automatically, you need to check your salary slip to find out the amount.

2. Home loan repayment

The home loan company will give you a statement telling you how much of principal you paid for the financial year.

3. Premium paid on policies

Any premium you pay for a life insurance or pension plan is eligible for a deduction.

All the above will be available for a deduction under Section 80C. Total them and deduct this amount from the limit of Rs 1,00,000. The balance amount is what you have to invest.

Let's say that Rs 24,000 has been the EPF contribution and you have paid Rs 36,000 on insurance premiums. You are not servicing a home loan. That means, you have exhausted Rs 60,000 out of your Rs 1 lakh limit. You now have just Rs 40,000 to invest to avail of the tax deduction.

Investing now

National Savings Certificate

Tenure: Medium term investment (six years)

Interest: 8% per annum

Risk: Nil (government backed)

Tax: The amount you invest is available for deduction under Section 80C. However, on maturity, the interest you earn is taxed.

Public Provident Fund

Tenure: Long term investment (15 years)

Interest: 8% per annum

Risk: Nil (government backed)

Tax: The amount you invest is available for deduction under Section 80C. The interest earned is tax free.

Equity Linked Saving Schemes

Tenure: Three years

Return: Not guaranteed and depends on the performance of the stock market.

Risk: Since these are mutual funds that invest in stocks, the risk is high

Tax: The amount you invest is available for deduction under Section 80C. The money must be blocked for at least three years after which you pay no tax on the profits. Dividends too are tax free.

Here are some funds you can consider.

The terms average, high, low are with reference to other such funds in the same category. It is a comparison between fund peers.

NAV is the Net Asset Value which is the price of a unit of a fund.

This data is as on March 6, 2006 and has been supplied mutual fund research organisation, Value Research. 

Franklin India Taxshield
NAV: 114.25
Return: Average.
Risk: Below average

HDFC Long Term Advantage Fund
NAV: 80.572
Return: High
Risk: Low

HDFC Taxsaver
NAV: 122.645
Return: Above average
Risk: Low

Magnum Taxgain
NAV: 57.56
Return: Above average
Risk: Above average

Prudential ICICI Tax Plan
NAV: 79.41
Return: High
Risk: Average

While NSC and PPF are investments worth considering, exercise caution with ELSS. In fact, it is wise to avoid such funds now. With the market being so high, no one can say which direction it is headed and what the state of the market will be in three years' time (when you are permitted withdrawal).

Such funds must be a very long-term investment and the best way to invest in them is to do so via a Systematic Investment Plan whereby you invest fixed amounts every month so that the cost you pay for the units averages out over time.

• Should you invest in stocks now?

Infrastructure bonds

Currently, as on March 7, 2006, there is no issue available in the market. And, if there is an issue later, the interest rate will most probably be lower than what you will get in PPF or NSC.

Life insurance & pension plans

Don't rush into taking a life insurance or a pension plan. Choosing them requires planning (income, dependents, future goals, any other policies currently being held must be considered, costs of the scheme).

Should you take one in a hurry, you may end up with a scheme that is totally unsuited for your needs.

Once you have figured out how much has to be invested, get moving. Don't pay more tax than you have to. Take advantage of all the tax benefits.