As per the latest budget amendments, for the AY 2011-12 a deduction of INR 20,000 has been proposed for investments made in notified long term infrastructure bonds. This deduction is in addition to the deduction available under section 80C in case of Individuals and HUF.
There are several savings schemes or investment products that fall under Section 80C of the Income Tax Act. The money invested in various approved schemes up to a limit of Rs 1.2 lakh is deductible from one’s salary. Hence, Section 80C of the Income Tax Act forms the cornerstone of their tax saving strategy. Section 88 was scrapped in Finance Bill 2005; instead Section 80C was introduced from the A.Y. 2006-07 onwards. Instead of offering tax rebates, investments under Section 80C are qualified for deduction from gross total income to Individuals and HUF. The tax breaks for long-term investments range from zero risk investments like PPF to risky options like equity-linked savings scheme (ELSS). The section encourages spending for insurance protection and it also provides relief for those spending on their dependents. Therefore, there is no ‘one-size-fits-all’ formula for this section. The only way to go about planning taxes is to define your age and income group and choose the appropriate options. Typically, most people invest a large part of the money in Public Provident Fund (PPF) and the rest is taken care of by life insurance premiums and so on. Here’s some help on how to go about allocating this 80C limit depending upon your age.
Let’s look at the options first. There are two options that you have:
• Non-investment oriented
The Investment options would comprise of the following:
• Employee Provident Fund (EPF) and General Provident Fund (GPF)
• Public Provident Fund (PPF)
• National Saving Certificates (NSC)
• Bank Deposits
• Life Insurance Premiums
• Equity Linked Saving Schemes (ELSS)
• Pension Policy Premiums
• Pension Schemes of Mutual Funds
• Senior Citizens’ Savings Schemes (SCSS)
The non-investment options would include:
• Home Loan principal payout
• Children’s school and college fees
So how do you decide which 80C option to go for? For the employed, it’s important to remember that the contribution that you make in the EPF qualifies for the overall limit. So, only the gap has to be invested prudently.
Age 21-30: In the initial phase of six-seven years of this age bracket, most people are single and little or no dependents. If there are no dependents, it’s not necessary to have a large life insurance. Instead focus on returns. Considering the state of the equity markets today, a substantial portion – around 70 per cent to 80 per cent of the 80C contribution can be made in ELSS, which invests primarily in stocks. This will ensure that you have started the process of investing for the long term. Also, since there is a
lock-in of three years for these schemes, it will lead to a forced savings. When choosing an ELSS investment, look at consistency rather than a one-off performance. Go for fund houses that have a good track record over a long time period. The balance can go into GPF or EPF
Age 31-40: By this time, you are expected to be married with small children. Also, there could be additional liabilities like buying a house or car. The first step that must be taken is to get life insurance, for dependents and liabilities. Make sure you cover all your liabilities so that dependents are not under any financial pressure, in case of an unfortunate mishap to you. Use a term plan to get the highest possible cover at a low cost. The home loan principal payout can form the second leg of the contribution for this age group. So, besides EPF contribution, life Insurance premiums and home loan principal should be sufficient to take care of the entire Rs 1 lakh requirement. If there is still any shortfall, look at ELSS investments and Provident Fund.
Age 41-50: You are probably at the peak of your career or moving towards it. Even children will be reasonably grown up. You would be paying college fees that can be included as a part of the 80C benefits. The last few years of this phase is when a lot of families plan and should retire their loans. It is also an age where life insurance is of extreme importance. Re-evaluate your need for life cover at this point of time. If you need more, increase it substantially.
Also, lifestyle diseases, small illnesses and stress are taking a toll on many families in this age group. Hence, risk management is of extreme importance here.
Once again, after you are well-insured, look at ELSS and Provident Fund as the two instruments to park the balance. The exact contribution to ELSS, GPF or PPF is a function of your risk taking measure, expected returns and liquidity needs.
Age 50-60: This is most likely the final phase where you earn a regular income. There is a good chance that loans have been paid-off by now and children are in the stage of becoming independent. In this phase, you must contribute as much as you can towards Provident Fund. This is because it has maximum liquidity and you could withdraw these tax-free funds (as you would have completed the mandated 5 years). You can also go for PPF first and then invest the balance in ELSS. Senior citizens: In this age group, capital protection and need for regular income are two most important needs. You must first opt for a Senior Citizens’ Savings Scheme that will give you this benefit. Since SCSS is generally parked in a lump sum, look at fixed deposits only if they are giving you high interest rates. If interest rates are low, then you should opt for PPF, if you are in the highest tax bracket as liquidity is still the best (your account should have completed 15 years a long time ago) and you can withdraw tax-free amounts comfortably.
A minor portion, around 10-15 per cent, of your investments can go into ELSS, as it has the ability to beat inflation and give you growth in funds. However, do this only after you have secured your income needs.
Other important points need to be considered:
ü Never exceed the Rs 1 lakh limit U/S 80C.
ü Account for EPF, expenses, home loan repayment etc. before opting for other investment options.
ü To make the most of your Section 80C tax planning, lay out your options when a financial year starts and not when it ends.
ü Always account for the returns availed after tax and not before to get the complete picture.
ü Choose investment options with care and don’t blindly opt for an option that may not work in your favour in the long run.
ü Quite a few changes might occur whenever the proposed New Direct Taxes code is implemented. This could lead to the possible implementation of the EET (Exempt-Exempt-Tax) regime which is especially likely to affect provident funds and life insurance option U/S 80C while on the other hand the investment limit eligible for tax deduction may be increased to Rs 3 lakh.