Tax Planning – Earlier the better

Regular investments in Section 80C instruments earn better returns as well as reduce the pressure on your funds.

During the month of October, most offices circulate an investment declaration form. This form asks the salaried individuals to list out investments, premiums paid for medical insurance and interest payout on housing loan that have either been made or will be made during the financial year 2008-09. Accordingly, companies make provisions to deduct taxes.

However, it has been noticed that many fill this form without having any actual idea about investments they will make and how. And then there is a last-minute scramble to invest to save tax in the month of February or even March. “This is why tax-saving products such as equity-linked saving schemes (ELSS) and unit-linked insurance product (Ulip) have the highest sales in the month of March,” says Vikas Vasal, executive director, KPMG.

According to him, since most people do not realise the importance of planning taxes at the start of the year, they end up stressing their finances at the very last moment. Tax planning needs to be taken care of in the very beginning of the financial year. For instance, if you were to invest Rs 1 lakh in instruments listed under the Section 80C of the Income Tax Act over a year, the monthly outgo is Rs 8,333 a month. And even if you have delayed it till now, starting in October when there are six months still to go, there is a good chance that the planning will be done better.

Equity-Linked Saving Schemes: Over the long term, equity as an asset class does much better compared to other tax-saving instruments. But to get the maximum returns, investments need to be done regularly through the systematic investment plan (SIP). The biggest mistake investors make is they put the entire money at one go in March.

As the equity markets are doing quite badly now, investors could enter the market now to get more units. “If the taxpayer invests in ELSS through an SIP, the investment will not only give him more units, but also preserve the actual value of his investments, in case the markets witness a similar turmoil in the future,” says Sajag Sanghavi, a certified financial planner.

Public Provident Fund: Financial planners say that among all the debt-based options available, Public Provident Fund (PPF) is the best investment avenue. A PPF account gives flat 8 per cent returns on the investment. But the interest is paid between the dates 1 and 4 of every month

Tenure (years) 15 6 3 3
Min. investment (Rs) 500 100 500 5,000
Max. investment (Rs) 70,000 100,000 100,000 100,000
Safety Highest Highest High Risk Highest
Return (CAGR) 8 8 12-25 5.50 – 6
Interest frequency Compounded



half yearly

No assured


Options available
Tax on interest income Tax free Taxable Dividend & capital

gains tax free


So it makes sense to invest in the early part of every month to earn optimum interest.In fact, instead of putting the entire money at the year-end in March, if there are enough funds, you should invest the upper limit of Rs 70,000 in the beginning of the financial year in April. This way, the money earns interest for the entire year.

What makes PPF even more attractive is that the returns are completely tax-free. The first tenure for a PPF can last for 15 years. It can be further renewed thrice for five months. But the maximum investment allowed in PPF is Rs 70,000 every year.

Housing Loan: This comes under Section 24, where you get benefit on the interest payout up to a limit of Rs 1 lakh. The principal payout gets benefits under Section 80C up to Rs 1 lakh. However, in the latter case, the total tax benefit that is available is Rs 1 lakh across all the instruments like contribution to company provident fund, contribution to PPF, life insurance premium, NSC and others. In case, the home loan is taken for a second house, the taxpayer is allowed deductions for the entire interest amount.

Others: The other instruments that come under the Section 80C declaration include bank deposits for five years or more and National Savings Certificates. Taxpayers can also claim deductions for children’s fees up to Rs 12,000 per child, for a maximum of two children.

Also, premiums of a life insurance policy are eligible for a tax deduction up to Rs 1 lakh. But if the premium paid during the term of the policy is more than 20 per cent of the sum assured, then deduction will be allowed only for premiums paid up to 20 per cent of the sum assured.

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