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Maximise your gains, not just save on taxes
January, 05th 2010

Come January and its time to plan tax-related investments. The usual favourites are Public Provident Fund (PPF), National Savings Certificates (NSC), and equity-linked savings schemes (ELSS), bank deposits, and life insurance, which help you save taxes up to Rs 1 lakh under section 80C. But what we need to follow is a systematic approach to make gains from these investments than merely save on taxes.

The best thing for an investor to follow is to invest in tax-saving instruments from April itself. The salaries shrink in the months of January and February. At this juncture, investing the balance funds for saving taxes will tighten cash flows, says Suresh Sadagopan, a certified financial planner, Ladder 7 Financial Advisories.

Make PPF a habit

Investors tend to invest chunks in PPF in the last two months of the financial year. In such cases, investors dont benefit from the annual return of 8%. Ideally, an investor should invest before the 5th of every month in PPF to earn interest for that month. In case of cheque payments, ensure your cheque gets cleared by this date.
gain from health cover

Most employers offer health benefits to employees in the form of group mediclaim covers up to a maximum of Rs 5 lakh. Hence, you may not feel the need for a standalone mediclaim. PV Subramanyam, a chartered accountant and financial trainer says: The need for this cover will be felt especially in case of a job loss, retirement or a job transition as the employers cover will lapse. You can opt for a family floater for dependents and benefit from lower premiums of up to 20%. Additionally, you save taxes of up to Rs 15,000 if you cover your dependent parents.

Cashing in on your house

If you and your spouse bought an apartment for Rs 60 lakh and made a down payment of Rs 15 lakh, both will borrow Rs 22.5 lakh each, assuming the ownership share is in the ratio of 50:50. The overall tax deduction in your case would amount to Rs 3 lakh. The tax benefit will be shared in the same ratio as the ratio of the loan amount availed by the husband and wife. The idea is to give a higher ownership share and hence, the higher liability to an individual with higher taxable salary.

Whatever strategy you plan, do so only for the current financial year. The tax planning exercise is set to change once the new direct tax code comes into effect from April 2011. We still have to read the final print, which is awaited.

Both the PPF and the EPF, which are currently under the EEE regime, are likely to move to the EET regime of taxation as mentioned in draft proposal. This implies the final corpus accumulated through these investments will be taxable in investors hands, says Vikas Vasal, executive director of KPMG.

As per current stipulations, these investments are neither taxed at the time of investment, nor at the time of the maturity. If the draft code was implemented without any changes, these investments would be basically exempted at the time of investment and during the tenure of the investment. But the final corpus would be subjected to tax proceeds at the time of maturity/sale of the investment.

However, investors will benefit from the grandfather clause. If an individual has accumulated Rs 10 lakh till March 2011 and accumulates Rs 2 lakh in the next two years, the latter would be added to the investors taxable income. Depending upon his tax slab, the investor has to pay a certain percentage as tax on Rs 2 lakh at the time of maturity and not the entire Rs 12 lakh, adds Vaibhav Sankla, executive director of Adroit Tax Services.

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