Jan 24, 2012

DIFFERENT INSTRUMENTS FOR VARYING TAX SLABS

With January almost gone, and your company's human resource executive breathing down the neck for tax investment papers, you may just want to get over with it. The result, certified financial planner Malhar Majumdar says, is many end up investing in both public provident fund (PPF) and New Pension Scheme (NPS), which have similar goals. "There is no point investing in both, as these address the same goal (retirement planning) and provide similar tax benefit. NPS is an annuity-based product, while PPF works like a fund (only accumulates)," says Majumdar. While it is imperative to choose investment instruments in accordance to your financial planning, it is also important to choose these keeping tax saving in mind. This because there are way too many instruments prescribed under Section 80C and choosing from these may not be very easy. Given individuals in the lowest tax brackets are likely to be youngsters who have just begun their careers, Majumdar recommends NPS to them (up to 30-35 years), as this takes exposure to equities (up to 50 per cent) and helps in better growth over longer term, even with associated risks. PPF is meant for those above 50, as safety is more important. It does not make sense for those in the highest tax bracket to invest in fixed income products, where interest income is taxable like five-year fixed deposits, says certified financial planner Pankaj Mathpal. These suit ones in the 10 per cent tax bracket, as the net income after tax deduction is higher. Debt products, like tax-free bonds, are recommended for those in the highest tax bracket, as the interest is entirely exempted from tax, and it can be assumed this group may have excess cash in hands, even after utilising all their sections. Section 80C and Section 80D instruments may suffice for those in the lowest tax bracket. But, this is not a fit-all rule. Many may be freshers and could use their education loan repayment to claim deductions under Section 80E. "In the lowest tax bracket, we need to check if one will continue to be in the 10 per cent bracket or will be below that," suggests Vivek Rege, a certified financial planner. If you earn up to Rs.3 lakh and have a Rs.1lakh investment, you will be paying zero tax and, hence, would be below the 10 per cent bracket. Those earning up to Rs.5 lakh will pay 10 per cent tax, even with an investment of Rs.1 lakh. Tax planning, experts say, is more important in the higher tax bracket. Equitylinked saving schemes are recommended for those in the 20 and 30 per cent slabs. Depending on the amount to be saved (as employee provident fund takes up a large part of the Section 80C limit), instruments under Section 80C, 80D, 80CCF and deduction interest on home loan repayment (Section 24) could be enough for those in the 20 per cent bracket, say experts. Those in the highest tax bracket will have to look at more sections to seek higher tax exemption, say experts. It is more important for them to claim deductions for house rent allowance (HRA), leave travel allowance (LTA), medical reimbursement, conveyance allowance, etc. Irrespective of the bracket you fall in, investment-linked insurance products only eat into your savings, without adding much value to your portfolio, financial planners stress. Make sure you have a term insurance cover and health cover. It may happen that you do not have enough cash for tax-saving investments, here you could claim deductions for expenses towards childrens education and stamp duty/registration for a new property. - www.business-standard.com

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