Tax Saving Tips

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Insurance is essential for every individual. Though it should never be bought as a tax-saving avenue alone, it can help to reduce your tax burden.

LIFE INSURANCE
The premium paid for a life insurance policy that covers you, your spouse and dependent children is eligible for deduction of up to Rs 1 lakh under Section 80C. However, this should not prompt you to buy a money-back or endowment policy where you have to pay high premiums.
A better alternative is to opt for pure term plans, which are cheaper than traditional policies, and invest the balance money in other tax-saving avenues that deliver higher returns.

HEALTH INSURANCE
Buying a medical insurance policy will provide you peace of mind and tax savings. You can claim a deduction of up to Rs 15,000 under Section 80D for the premium paid for a health cover. You can also buy health insurance for your parents for an additional deduction of up to Rs 15,000. The limit is increased to Rs 20,000 in case of senior citizens.

A TAX HAVEN
Here's how expenses on your house can also help you save tax.

HOUSE RENT
The rent you pay is often a big chunk of the household expenses. Most employers structure their salaries to include a house rent allowance (HRA), which is exempt from taxes if receipts are furnished.
The lowest of these three will be considered as exemption on HRA:
a) The HRA received
b) 40% of the basic pay (50% in case of metro cities)
c) The rent paid minus 10% of basic pay If your salary does not include HRA, you can still claim a deduction under Section 80GG. However, to claim this, you or your family (spouse and minor children) should not have a residential property in the place of accommodation. You should also not have a self-occupied house in any other place.

The least of the following can be claimed as a deduction: rent paid less 10 per cent of the total income, 25 per cent of the total income or Rs 2000 per month.

If you're a landlord who receives rent, you can claim a standard deduction of 30 per cent on the annual value under Section 24. You can also deduct municipal taxes from the amount of rent received.

HOME LOAN REPAYMENT
If you have taken a loan, the EMIs you are paying will help you out of the tax quagmire. The cumulative principal amount of the EMIs paid is eligible for deduction of up to Rs 1 lakh under Section 80C. However, the deducted amount will become taxable if the property is transferred within five years of the claim. The bigger advantage is the deduction you can avail of for the interest component of the EMI. You can claim up to Rs 1.5 lakh under Section 24(B).
The benefits double if you have taken a joint loan as both co-borrowers can avail of the tax deduction separately.

SAVINGS AND INVESTMENTS
Putting your money in the following financial avenues can help relieve your tax burden.

PROVIDENT FUNDS
It may pinch a little to watch a part of your salary go into the employees provident fund (EPF) every month, but this can be a saving grace now. The money that has been contributed to the EPF is eligible for tax deduction of up to Rs 1 lakh under Section 80C. This benefit is available to all recognised provident funds, including the public provident fund (PPF), a favoured avenue for investors as it carries no risk and gives a return of eight per cent. In case of the PPF, the maximum deduction allowed is Rs 70,000.

Also, the 15 year lock-in period ensures that you reap the benefits of the power of compounding. However, if you need to, you can withdraw up to 50 per cent of the money in your account from the seventh year onwards.

The EPF usually gives a return of 8.5 per cent, though this year it has proposed to increased it to 9.5 per cent. Negotiations are also on to use a portion of the EPF corpus to invest in the stock market. If, and when, this does happen, you could hope to earn even higher returns. Also, you cannot withdraw the money till you retire or opt out of the job market, which means that you're also steadily building your nest egg. You can withdraw the money if you desperately need it for specific purposes.

PENSION SCHEMES
A pension plan is an important tool that can help you build a retirement corpus. You also earn tax benefits as contributions up to Rs 1 lakh are deductible under Section 80C. You can choose from three types of pension plans - unit-linked pension plan, plans from mutual funds and the National Pension System. These are cheaper than Ulips because they do not offer life insurance.
However, on maturity, only 33 per cent of the corpus that you get will be exempt from tax. If you do not get gratuity, up to 50 per cent of the pension corpus can be commuted.

NSCS AND FDS
Investments in National Savings Certificates (NSCs) are as secure as those in the PPF. However, the returns earned from them are taxable, so these are less profitable. What appeals to most investors is the shorter lock-in period of six years. Another less risky instrument with a short tenure is five-year fixed deposits (FDs) with banks or the postal department. The interest rates for FDs vary each year, though they usually fall in the range of seven to eight per cent.

INFRASTRUCTURE BONDS
These bonds can help to further lessen your tax burden as investments in infra bonds can be claimed as an additional deduction up to Rs 20,000 under Section 80C, beyond the Rs 1-lakh limit. However, these may not be suitable for all investors.

ULIPS
The overhauling of unit-linked insurance plans (Ulips) by the Insurance Regulatory Development Authority (IRDA) has made these plans more attractive. Most people prefer to invest in Ulips as these offer a unique combination of life cover, equity exposure and tax savings. Investment in Ulips can be claimed as deductible under Section 80C up to Rs 1 lakh. Though you may only need to pay the premium for three to five years, to get the maximum benefit from your investment, it is advisable to remain invested for at least 10 years.

SENIOR CITIZENS SAVINGS SCHEME
This scheme offers a return of nine per cent, higher than those offered by most other safe instruments. However, the income is taxable though it should not affect you much as the tax exemption limit for senior citizens is Rs 2.4 lakh per year.
Investment in this scheme is again eligible for deduction under Section 80C

EQUITY-LINKED SAVINGS SCHEMES
ELSS have an edge over other tax-saving instruments as these have the largest equity exposure compared with others. This also ensures higher returns in the long run. Over the past year, tax-saving plans have delivered an average return of 14.5 per cent. The top ELSS over five years, Canara Robeco Equity Tax Saver, has delivered 22.26 per cent returns. However, ELSS may not be everyone's cup of tea as they are also considered more risky.

THE LEARNING CURVE
You may grumble about how expensive it is to educate your children. But this can provide a
respite when you have to save tax.

TUITION FEES
Under Section 80C, you can claim deduction of up to Rs 1 lakh for the tuition fees paid for two children. This can be availed of by both the parents, though not for the same two children. Only the tuition fees paid for full-time courses of institutions based in India are eligible. Other expenses such as transport fee, development fee and hostel charges, among others, do not qualify and neither do fees paid for coaching classes or to institutions abroad.

EDUCATION LOAN
If you have availed of a loan for your education or that of your spouse or children, the interest paid on the amount is eligible for deduction from your income under Section 80E. This is in addition to the `1 lakh deduction allowed under Section 80C. However, you cannot claim the benefit for repayment of the principal amount.

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