Right Decision on Right Time

From last month (April 2014) our new financial year will be going to start. People rush to buy tax-saving plans at the fag end of a financial year. But so many experts suggest a well thought out tax planning from the beginning of the fiscal year reduce our tax amount.

One of the common mistakes many people do is choosing the wrong tax saving instruments. There are many tax saving avenues available, but good financial planning involves picking the right tax-saving schemes, which not only save you from tax burdens but also benefit you financially. A last minute decision to buy tax-saving instruments brings neither the desired tax savings nor the expected returns. So try to make your plans before the onset of March.

                                             Before short listing the tax-saving instrument, evaluate different options and choose the one most suited for your needs.

Public provident fund (PPF)

                                            PPF is a popular tax-saving instrument with the linking of PPF interest rates to bond yields in the secondary market, PPF now offers returns at par with other financial instruments. While maturity and tax on the interest earned is tax exempted in PPF. The ease of opening on account and liquidity makes it a perfect financial instrument for many. The PPF is good especially for high-risk invests as well as self-employed professionals, who are not covered under the employer provident fund scheme.

Equity linked saving scheme (ELSS)

                                            ELSS is a more risky proposition than PPF and needs investor prudence before investing with good returns and tax-free status, ELSS funds offer a great opportunity to be part of effective tax management. ELSS funds have a 3 year lock in period which is amongst the shortest a mid of tax-saving instruments covered under section 80C. Being a equity linked fund, there is, however no guarantee of returns, which are dependent on stock markets and the financial sentiment of the market in general.

Unit linked insurance plan (ULIPS)

                                            ULIPS are market –linked insurance schemes that offer tax saving options under section 80C. ULIPS offer life cover with an investment in equity and debt markets along with tax saving. But most ULIPS have the higher premiums and the policy is discontinued if one takes a premium holiday.

Voluntary PF (VPF)

                                            VPF is a lesser known tax saving instrument designed as an extension of the employee provident fund, VPF account can be created with the help of an employer in each financial year. Once initiated the employee will deduct 12 percent of the basic and dearness allowance for the salary to the Voluntary PF account.

Senior citizen saving scheme (SCSS)

                                                 SCSS is a good tax saving instrument for the elderly. This saving scheme offers nine percent returns on deposits only people above the age of 60 years can opt for the scheme. The downside is that although one can open multiple saving scheme accounts. The total amount of investment cannot exceed 15 lakhs. It qualifies for deduction, but the interest gained is taxable.

New pension scheme (NPS)

                                                  An ideal investment vehicle for retirement planning. But in the NPS, tax deductions are allowed only for contributions to tier 1 NPS account with a min investment of 6000 a year. No withdrawal is allowed till you are 60 years of age.

National saving certificates and FD’s

                                         National saving certificates and FD’s have traditionally been widely used financial instruments. While these are tax free deposits, meaning one can save tax under section 80C of the IT act, they are not tax free as understood wrongly by many individuals. The government regulation announced a couple of years ago offer deduction of up to 10000 on interest earned in the saving banks account and not any recurring deposits.

Rajiv Gandhi equity saving scheme

                                             Offers tax savings for a year for the first time investor. First time investor in this scheme can claim a deduction of 50 percent of the invested amount. The maximum investment is fixed at 50000 with a maximum deduction of 25000. Another thing to note here is that the deductions option is applicable for money over and above 1 lakh limit available under section 80C.