Tax planning:-

It’s been six months since this financial year started. We’re half-way through, having earned half of our projected salaries for 2008-09 . Most employers expect the tax-planning process for their internal tax deductions to be completed by January.

But, for this, they urge their employees to finalise the same by year-end . However, I would say that now is the time to make tax investments, especially in the case of fresh employees who are in the first year of employment and don’t have experience.

For this, it would help if you are aware of the amount you need to save. Generally, this should have been provided by the employer by now. Although self-employed people have their task cut out as they have to calculate this themselves – up to the upper limit of Rs 1 lakh.

Choosing tax-saving products:-

This generally depends on the comfort and risk-taking abilities of the investor. For instance, not many find it easy to invest in an ELSS (equity-linked saving scheme) as it carries the usual stock-related risk with lack of assured returns. Most like public provident fund (PPF) as it’s simple and assures a return of 8 per cent.

Section 80C, which covers tax-saving instruments, has a number of products under its fold for providing such benefits: Insurance policies (all products), pension plans, fixed return schemes like NSC, fixed deposits with lock-in period of five years, PF deductions made by your employers, etc.

Creating long-term wealth:-

Young professionals can use market-linked tax-saving products, such as ELSS and ULIPs (unit-linked insurance plans) for building wealth in addition to getting tax relief.

One advantage of ELSS is that its returns are tax-free , while ULIPs help in getting insurance and an exposure to the markets. Either one is a good choice in the present cheap stock market scenario.

A fixed return product will be extremely safe, but will help you in getting back the principal component only as the interest income is subjected to taxes.

What to do on maturity

An oft-asked query is what would happen if the value of an investment comes down at the end of three years? While the three-year lock-in is compulsory for ELSS, there is no compulsion on your part to withdraw the amount.

If the market conditions deteriorate and if the value of investment is lower than your initial amount, you can continue to hold on to the funds and look at withdrawal once market conditions improve.