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Taxed? Here's a savings grace
December, 28th 2006

While there are many people who are despairing the lack of resources to make tax-saving investments, there are others looking for every tax-saving opportunity. Here are a few issues both categories of people need to keep in mind to get the best out of tax provisions.

Choose instruments wisely: Making investments in eligible instruments certainly saves on tax. But, that is not a good enough reason to choose an investment since there are different lock-in, return and tax implications with each instrument. All these return and lock-in conditions are well documented. But, along with returns, also look at your cash flow needs. If you think you will definitely need a defined sum of money after three years, it may not make sense to go in for a product like PPF with a long lock-in or a relatively riskier product like an equity-linked saving scheme. Similarly, insurance is a long-term commitment; dont choose a low-yielding 20-year policy for the sake of immediate tax breaks.

Investment is not the only option: This is important for those with not enough money to make additional investments. Investments are just one way of getting tax breaks. Section 80C also permits one to claim expenditure incurred on tuition fees for up to two children to be included. Also permitted is deduction on account of repayment of principal on a housing loan. So, if you already have these payouts, alter additional investment needs accordingly. That there are no internal limits in the overall Rs 1 lakh limit for this section certainly will be helpful. And, dont forget to consider in your calculations the contribution you will cumulatively make to your provident fund account during the financial year.

Life beyond Section 80C: The section has an overall limit of Rs 1 lakh, which most have no problem of exhausting. Almost everyone can look to exploit the Rs 10,000 Section 80D limit on account of premium towards a health insurance policy. People with handicapped dependents (Section 80DD) or with expenditure on specified diseases (Section 80DDB) can claim further tax breaks. Then of course, there is the well known deduction available on account of interest on home loan of up to Rs 1.5 lakh per annum.

Remember conditions attached to each investment: Taking the tax break is the easy part. Sticking to the investment is more difficult. For instance, the provisions of the section specify that if the house property on which principal repayment deduction is obtained is transferred before five years from the date of possession, then no further deduction will be allowed. Further, the aggregate deductions allowed in the past will be added to the income of the current year and taxed accordingly. Each individual product too, such as an insurance policy, may have its own pre-mature withdrawal penalties. Find out the conditions from your chartered accountant and financial advisor before committing yourself to a new investment or withdrawing from an investment on which tax benefits have been claimed in the past.

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