The finance minister has scrapped Section 88 and introduced a new section, 80C. This section has redefined the way you can plan your taxes. To start with, the inflexibility has been removed. Now there is a Rs 100, 000 limit and you are free to invest in any proportion in the approved investments. Only in case of PPF is the upper limit capped at Rs 70, 000. Also, this section offers a’’’’’’deduction’’’ benefit as against a’’’’’’rebate.’’’ What this means is that the Rs 100, 000 that you save in the specified instruments is ’’’’deducted’’’ from your income; therefore the tax benefit that you are eligible for is equivalent to the tax rate that you pay. For example, if you are in the 30% tax bracket, then your tax savings will be Rs 30, 000 (Rs 100, 000 * 30%). Furthermore, Section 80C covers all taxpayers.
God bless the finance minister! New income tax structure Net Taxable Income Tax Rate Upto Rs 100, 000 Nil Rs 100, 001 to Rs 150, 000 10% Rs 150, 001 to Rs 250, 000 20% Above Rs 250, 000 30% Source: https://personalfn.com The net result -- you stand to benefit a lot more. Therefore, you must’’’’invest’’more time in finalising your tax-planning investments this financial year. The plan to invest for tax-saving should be driven by two objectives. One, to minimise the tax liability. And, two, to complement your existing investments in a manner that helps you meet your financial goals and objectives. It is important to note that tax planning is not an independent exercise. In fact it is an integral part of your overall financial planning. Asset Allocation for tax-saving instruments The key to achieving your financial goals is to first define an ’’’’’asset allocation plan’’’’’’’’’’’’’’’’ that suits your profile, needs and objectives/expectations. If you are, for example, planning for a need say 3 years down the line, then you will have a specific asset allocation.
Conversely, the asset allocation to plan for a need 3 months down the line will be entirely different. Any asset allocation plan has to be made in line with your risk profile. If you are capable of taking on additional risk, to earn higher returns, then you need to take higher exposure to assets like equity shares and vice-a-versa. Of course, it needs to be kept in mind that the instrument you are investing in has a matching investment horizon. In case of equity shares (in this instance tax-saving funds), it is three to five years; in case of NSC, the maturity is 6 years. So the instruments will need to coincide with your profile and investment tenure. The other critical component to building an asset allocation plan is a clear objective/goal (or expectation). Once you are clear in what you wish to achieve with your money, it becomes a lot easier to allocate assets. To take an example of how things go wrong, many a time investors park funds in say infrastructure bonds (3 year maturity) when they really need the money only 10 years down the line. The result is that you are invested in an instrument which gives you a post-tax return of no more than 5% pa even though you could have earned a lot more by simply matching the instrument you invest in to your need (tax-saving funds would probably generate a tax-free return of 12% over this period of time; of course the near term volatility is something that you should be able to absorb). A more diversified portfolio of assets (which also save you tax) can be planned to ensure that over 10 years you generate a much higher tax-adjusted return as compared to the infrastructure bonds.
Each instrument, which is covered under Section 80C, has its positives and negatives. However, what emerges is that there are sufficient options available today to plan your Section 80C investments in a manner that helps you achieve your financial goals and get a tax benefit to boot. The Employee’s Provident Fund contribution is really linked to your salary and not in your control (it is mandatory by law). Therefore as you progress in your career your contribution to the EPF will increase. The PPF is a very popular saving avenue. However, one must remember that the returns in this scheme are not fixed i.e. they are reset every year. So while today you may be parking your funds in PPF at 8% pa, the rate could stand reduced to say 5% pa 5 years down the line. Since the scheme has a tenure of 15 years, you will have no option but to remain invested in the same. Having said that, the PPF is still attractive because of the tax benefits associated with it (the interest received is also tax free). In fact, if your PPF account is nearing maturity you should increase your annual contribution. Otherwise, it is best to invest only a portion of your Rs 70, 000 limit in the scheme. The NSC, which has a 6 year maturity, scores over the PPF as the rate of return is locked over the period of investment. However, the interest earned from the NSC is taxable.
Finally, we have tax-saving funds (or ELSS -- Equity Lined Savings Scheme). In our view, for investment horizons that are in excess of three years, investors with appetite for risk, must park some portion of their funds in tax-saving funds. Currently, both dividends and capital gains earned from tax-saving funds are tax-free. This increases the attractiveness of these schemes. However, as appetite for risk reduces, contribution to the tax-saving funds should decline. A well-defined asset allocation plan for tax-saving instruments will help you realise not just your tax-planning objective, but also complement your overall financial planning. And given the flexibility and benefits that have been introduced this year, you should definitely spend more time on ensuring that your money works for you!