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Its time for tax planning
May, 19th 2007

The month of May could look to be a perfect month for you to plan your annual holiday. If you are a salaried professional, you have to add one more priority to your list. It's also the month where your employer will be demanding your tax planning strategies.

Though there have not been any drastic changes in the income tax rates compared to last year, a few new products have been added to the list of tax savings instruments. The fresh addition to the list this year has been NABARD bonds under Section 80C.

NABARD bonds, till now, were associated with capital gains for parking surplus made out of investments such as property. However, now these bonds have been included under Sectiion 80C which means investors have a much larger choice when it comes to debt options. However, details of these products in terms of interest rates and tenure are yet to be announced but one can safely presume them to be for a minimum tenure of three years.

With the introduction of NABARD bonds as a tax saving instrument, investors have a long list of debt products to choose from while planning for investments. Last year, bank deposits were added to this list but tenure was fixed at five years. With these deposits carrying an interest rate of 8-9 percent, bank deposits became one of the easy options for assessees, last year.

It's a perfect option for last minute investors as investing in a bank deposit is easy and quick.

In addition to bank deposits and NABARD bonds, there are other debt options such as NSC and public provident fund. When you compare them with a bank deposits, these carry a longer tenure of six and 15 years respectively. Both have been very popular because of their assured returns of eight percent. Another added advantage with them is the fact that both allow investors to borrow against their contributions. While one can borrow against a PPF balance, NSC can be used as collateral.

Those who don't chase assured returns can look at the option of market-related instruments such as ELSS (equity-linked savings schemes) or ULIP (unit-linked insurance plan) for their tax reduction. ELSS is an equity fund product with a minimum lock-in period of three years but does not assure guaranteed returns. ULIP on the other hand, is a combination of insurance and investment, as a portion of the premium gets invested in market related products such as equity or balanced funds. The advantage of ULIP is that it offers plenty of flexibility in terms of premium payments and allows the investor to choose his investment option.
 
Besides introducing new products such as NABARD bonds, the Finance Minister has also proposed a few changes in other perks such as employee stock option (ESOP) and house rent allowance. ESOPs has been brought under fringe benefit tax.
There is some good news for those enjoying accommodation provided by their employers.

The tax rate on it has been brought down from 20 to 15 percent (of salary) for those living in cities with a population of over 25 lakhs. In the case of smaller cities, where population is below 10 lakhs, the reduction is much sharper (from 15 to 7.5 percent). There is one word of advice though.

Before you take up your tax planning exercise, take into account your provident fund contributions for the year. Though an investment of Rs 1 lakh is allowed under Section 80C through various tax saving instruments, your monthly contribution to provident fund too comes under the overall limit of Rs 1 lakh.

Also, the tuition fee paid towards children's education (maximum of Rs 24,000 for two children) is covered under the overall limit of Rs 1 lakh. If you are not really worried about the tax saving limit and want to use the products as a savings option, you need not worry about the limit. In fact, tax planning has become irrelevant for many in the higher income groups as provident fund deduction invariably takes care of Section 80C limit.

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