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Tax planning for long-term benefit
December, 18th 2012

With just around 100 days left for the financial year to end, salaried employees will have to give finishing touches to their tax planning and ensure that they do not end up buying a financial product that is not beneficial in the long run. In the next three months, insurance companies will go on an overdrive with new tax-saving products, which apart from saving some taxes, may not serve the long-term protection needs of the policyholder.

So, before you rush to invest in an insurance product or purchase an equity-linked insurance scheme, ensure that the product you invest in suits your long-term needs and also takes care of any immediate liquidity needs. Ideally, your tax planning should start from April onwards, when the financial year begins. Those who go for tax-saving investments in the last quarter often blunder into products that may not be suitable for them. Apart from strained finances, the last-minute investor also stands to lose the interest he would have earned if he had started investing earlier.

Before you look at a new financial product, it is always prudent to look at the deductions you can get under various heads. Analyse your total income by adding up salary income, business income, capital gains, house property and other sources. Some of your expenses, for example, mediclaim premium payments (under Section 80D) and home loan interest payments (up to R1.5 lakh) will reduce your taxable income.

However, remember that they are not investments. If you have a mediclaim, pay your premiums by cheque and that, too, from your account to avail the tax benefit.

Under Section 80C, you can invest up to R1 lakh, which includes investments made in Public Provident Fund (PPF), life insurance premiums, national savings certificate of post offices, employee’s contribution to the Provident Fund, tax-saving mutual funds, five-year fixed deposits in banks or post office and pension plans.

For risk-averse investors, bank fixed deposits are a better option for investment and tax savings under Section 80C. However, time deposits less than five years — either in banks or post offices — will not qualify for tax savings. Even tuition fees paid for two children will be deducted from your income under Section 80C and the deduction will be on the actual payment of the fee and not on books, bus fare, private tuition, development fees, etc.

There are different kinds of life insurance policies like term insurance, money-back, market-linked, endowment, etc. While policies like money-back and endowment offer investment along with insurance, they are more expensive than term insurance. In fact, the government in the Budget 2012-13 had proposed to amend Section 10 (10D) where the exemption for insurance policies issued after April 1, 2012, will be available for those policies where the premium payable for any of the years during the term of the policy, does not exceed

 
 
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