Tag - Tax Planning

February 2010

Tax Savings – Section 80C – Part II

Tax Planning,minimizing the tax liability, section 80C, 80CCC and 80CCD,ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund),In this part, I will cover the Life Insurance premiums, pension plans on mutual funds and from insurance companies, and various expenses which are also eligible for deductions under 80C.

Life Insurance premiums covered under Section 80C
Premium paid towards life insurance for yourself or your family (spouse and children) is eligible for section 80C tax break. The maximum deduction available is upto a maximum of Rs. 100,000/- under Section 80C. The sum received (including bonus) under life insurance policy (excluding Key man Insurance) is tax free. Please note that Life Insurance needs to be planned properly and should not only be taken for the purpose of Tax savings. (Note that most of the Life Insurance companies come up with innovative , yet inadequate products during the Jan-Feb-Mar period every year to lure investors into schemes which offer inadequate coverage and inadequate returns. They know that people are looking out for avenues). Be-aware.

Types of Life Insurance Policies briefly are :

– Term Policy : This is the undoubtedly the best life insurance scheme which covers only Risk of Death and no survival benefits. This offers maximum coverage for lowest premiums.

– Endowment Policy : This plan accumulates capital over a period of time, returns sum assured + bonus at end of period and covers risk in case of premature death

– Money Back Policy : This plan accumulates capital over a period of time, provides periodic payment during the policy + balance and bonus at the end of period and covers risk in case of premature death

– Whole Life Policy : This plan runs through the life of the policy holder, requiring the payment of premiums throughout the life. There are no survival benefits to the policy holder as he is not entitled. Sum assured + bonus is payable to beneficiaries.

– Annuities : This is an investment that is made ( single lump sum payment or through installments ), in return for a specific sum that is received every year/ 1/2 year or every month, either for life or for a fixed number of years.

– ULIP – Unit linked insurance plans : Unit Linked Insurance Plan – is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire – equity, fixed-return or a mixture of both. Ulips gets covered under life insurance – 80C, and they are popular. However, you should avoid ULIPS as far as possible. I will discuss about this more on my ULIP Awareness post later on.

Pension Plans from Mutual Funds covered under Section 80C

There are two mutual fund pension plans –Templeton India Pension Plan  and UTI Retirement Benefit Pension Plan. Both have a mandatory lock – in period of 3 yrs. And they encourage investors to invest for long term. THese funds are primarily debt oriented mutual funds and offer tax benefit under Section 80C. However these funds have not yet gained popularity among investors. Pls note that unlike traditional pension plans of insurance companies, these mutual funds do not provide pension or annuity.

Regular Pension plans of Insurance Companies covered under section 80C


Pension plans are offered by insurance companies and the contributions, qualifies for tax benefit under section 80CCC instead of section 80C.

Payment of premium for annuity plan of LIC or any other insurer Deduction is available upto a maximum of Rs. 100,000/-. (aggregate deduction under Sec. 80C, 80CCC and 80CCD)

Tax Savings – Section 80C – Part I

Tax Planning,minimizing the tax liability, section 80C, 80CCC and 80CCD,ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund),Tax season is around the corner.

Tax Planning involves making investments with the objective of minimizing the tax liability and maximizing returns. You should try do tax planning to maximize your income by saving on taxes. Section 80C, of Income Tax Act, 1961, gives a number of options that can be used for the purpose of tax deduction.  The total deduction under this section (alongwith section 80CCC and 80CCD) is limited to Rs. 1,00,000/- (One Lakh).

There are avenues such as ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund), VPF (Voluntary provident fund), NSC (National Savings Certificates), Various types of Life Insurance schemes, ULIPs (Unit-linked insurance plans), 5-Yr Post Office Time Schemes, NABARD (National Bank for Agriculture and Rural Development Bonds) and Life Insurance Premium

Equity Avenue:

Equity linked savings scheme (ELSS)

This is considered as the one of the best 80C option. It is a mutual fund scheme investing entirely in equities and therefore has the potential to deliver the best returns. There is a 3-yr lock in which is involved in this option. (This is also the shortest lock in period available when compared to other avenues) You can visit the following sites to get more information on the best performing mutual funds in this category www.valueresearchonline.com. Some of consistent good performers in this category are Canara Robeco Equity Tax Saver, HDFC Taxsaver, Sundaram Tax Saver.

Debt Avenues:

PPF – Public Provident Fund

This is a assured returns small saving schemes. Current rate of interest is 8% and the normal maturity period is 15 years. The interest earned on deposits in PPF accounts is fully exempted from income tax. Minimum contribution is Rs 500 and maximum is Rs 70,000. (There is flexibility to make Deposits in installments up to maximum 12 installments) Note that the interest rate is assured but not fixed. The interest and principal in a PPF account cannot be attached by a court decree. Open a PPF account and invest at least the minimum amount of Rs 500, maintain every year, even if you do not intend on using it for investment immediately. The reason is that  after 10+ years, original lock in period of 15 years will get reduced to just < 5 years. And this is of good advantage for parking funds, assured returns, (for short period) at that point in time in future.

EPF – Employee’s Provident Fund

PF is deducted from your salary.You and your employer contribute to it. Your contribution forms part of 80C investments.

NSC – National Savings Certificate

This is a 6-Yr small savings instrument . Rate of interest is 8% compounded half-yearly, so, the effective annual rate of interest is 8.16%. If Rs 1,000 is invested, then it becomes Rs 1601 after 6 years. Minimum amount is Rs 100/-. There is no max limit. The interest accrued every year taxable, Interest accruing annually is automatically reinvested, and such re-invested interest qualify for tax rebate under section 80C of the Income Tax Act.

POTD – 5-Yr Post-Office-Time-Deposit Scheme

Post Office Time Schemes are similar to bank fixed deposits. Scheme offers the facility of investing surplus funds at relatively higher rates of interest. They are available for variable duration like one year, two year, three year and five year. However , 5-Yr post-office deposit qualifies for tax saving under section 80C (This is w.e.f financial year 2007-2008, assessment year 2008-2009). This offers 7.5 per cent rate of interest and the Effective rate is 7.71% per annum (p.a.). The rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable. Minimum amount is Rs 200/-. No Maximum limit.

BTDS – 5-Yr Special Bank Term Deposit

BTDS is the only deposit scheme with banks where tax benefits under section 80C are available to depositors. Interest rate varies from bank to bank. Interest is taxable. Tax is deducted at source. Unlike FD’s , premature exit is not possible. For , as of Feb 2010, Eg: Axis Bank Interest Rates On Domestic Deposit is 7% (7.5% for Senior Citizen). Interest Rate for Tax Saver deposit is 7.25% (8% for Senior Citizen). Minimum amount is Rs 100/-. Maximum amount is Rs 1,00,000/-

POSCS – Post Office Senior Citizen Savings Scheme 2004

Post Office Senior Citizen Savings Scheme (SCSS) is the is meant only for senior citizens.It is the most lucrative scheme. Current rate of interest is 9% per annum payable quarterly.Interest is payable quarterly and not compounded quarterly. Thus, unclaimed interest on these deposits will not earn any further interest. Interest income is chargeable to tax. Minimum amount is Rs 1,000/- and maximum amount is Rs 15,00,000/-.

I will continue this post in next couple of days and cover other avenues as well……