Begin tax planning now

Nitya Varadarajan
November 13, 2008

It’s now November and, chances are that you have already been handed your tax liability sheet for 2008-09. If you are a salaried
professional, your accounts department has handed you one and if you are self-employed or in business, your chartered accountant
must have done so. Have you booked losses in the stock market and are you wondering whether these can be set off against income
or gains that may have accrued to you during the year? Surely, these are important questions that you need to consider along with
the various tax planning Schemes. To help you get going with the exercise now, instead of running helter-skelter towards the fag-end
of the financial year, here’s a quick guide on various tax-saving options available.

To begin with, taxation laws allow for the setting off of short-term capital losses on investments in equities and equity-linked mutual
funds (MFs) against similar shortterm capital gains. Short-term capital gains or losses accrue when equities or equity-linked MFs are
sold under a year of buying them, but not when you sell your shares under an open offer or a buyback Scheme.

“Short-term capital losses can also be set off against any gains from the sale of property,” says G. Sekar, a Chennai-based chartered
accountant and a certified tax planner. That’s good news for all those who may have sold property for a hefty profit during the boom
in real estate prices earlier this year but have also incurred losses on investments on the stock market subsequently.

Talking of the stock market, though a lot of people have burnt their fingers in it and sworn to stay away from it, the sheer fall in the
stock prices makes it attractive to invest in it through ELSS (equitylinked tax-saving Scheme) MFs. Its advantages are that it locks
your investment for three years—long enough for the economy to come out from the current slowdown— and a good Scheme can
give you greater “real” Returns than individual stocks if you add up the Tax benefit. Under Section 80C, investments of up to Rs 1
lakh in ELSS are exempt from taxation.

But investing in ELSS in one shot is not the way to go. Says J. Karthikeyan, Director, Finerva Financial Solutions: “The investment
must be done in an SIP (systematic investment plan). In a falling market, SIP works out very well by averaging your cost and
provides better Returns than a onego investment.’’ ELSS’s drawback is that it doesn’t let you sell half-way through and switch over to
a better performing fund.

Public Provident Fund (PPF) and the National Savings Certificate (NSC) Schemes are popular tax-savers that offer a modest 8 per
cent interest per annum but a high degree of safety (see chart Tax Planner). However, PPF scores over NSC in that its interest
income is not taxable. Says Karthikeyan: “The long lock-in effectively precludes inflation-beating Returns.” According to him, PPF is
more suitable for businessmen than salaried employees, as a PPF account cannot be attached during insolvency proceedings. “In
the case of a salaried employee, the mandatory Employee Provident Fund deductions help save with Tax benefits. Therefore, he
doesn’t need to save in a PPF.”

According to Karthikeyan, saving should be goal-based. ULIPs (unit-linked insurance policies), for instance, are ideal for creating a
corpus for retirement or children’s education and are also covered under Section 80C. In this, the Returns are tax-free in the hands of
the investor. ULIPs also allow an investor to switch funds during a downturn and protect his investment, and, importantly, also gives
him a life cover.

But no tax planning exercise is complete without a health insurance policy, which protects one from prohibitive medical expenses in
times of illness of family members and dependents. Premium up to Rs 20,000 is fully exempted under Section 80D. Besides, you can
also donate a part of your taxable income to non-profit trusts and government relief funds and avail Tax benefits under Section 80G.

Housing loans qualify for a massive tax rebate. Under Section 80C, up to Rs 1 lakh of the principal, and under Section 24, Rs 1.5
lakh of the interest repaid every year is fully exempt. However, investing in a house is not recommended for tax planning purposes
alone. Says Karthikeyan: “When you are paying an interest of Rs 1.5 lakh, you don’t gain value—it is finally expenditure.” He adds
that even if one is in the highest income tax bracket of 33.6 per cent, it is still better to pay the tax (which works out to Rs 55,000 for
Rs 1.5 lakh). “The remaining Rs 95,000 could be invested for better Returns elsewhere,’’ he says. Therefore, plan wisely.

Tax planner
A snapshot of various tax planning Schemes.

Scheme: PPF Tax benefit: Section 80C

Limit: Rs 70,000 per annum
Returns: 8% per annum; tax-free
Lock-in- period: 15 years, though loans can be taken from the corpus

Scheme: Life Insurance (traditional and ULIP)

Tax benefit: Section 80C
Limit: Up to Rs 1 lakh but premium should not exceed 20 per cent of the sum assured
Returns: Depends on performance of fund, but Returns are tax-free
Lock-in- period: 3-5 years. Advisable to take policies for a minimum of 10 years

Scheme: Pension Funds

Tax benefit: Section 80CCC
Limit: Up to Rs 1 lakh
Returns: One-third can be commuted, rest has to be invested in an annuity, which pays
low interest rates
Lock-in- period: 10 years and above is ideal, but funds can be taken out earlier
 Scheme: National Savings Certificate
Tax benefit: Section 80C
Limit: Up to Rs 1 lakh
Returns: 8 per cent per annum
Lock-in- period: 6 years; can be securitised

Scheme: Bank FDs

Tax benefit: Section 80C
Limit: Up to Rs 1 lakh
Returns: Currently 11 per cent per annum
Lock-in- period: 5 years

Scheme: Medical Insurance

Tax benefit: Section 80D
Limit: Up to Rs 20,000
Returns: Returns to be weighed against cost of hospitalisation and treatment
Lock-in- period: Needs renewal every year

Scheme: Housing Loan Principal, Stamp Paper Charges, Registration

Tax benefit: Section 80C Limit: Up to Rs 1 lakh
Lock-in- period: For the duration of the loan

Scheme: Housing Loan Interest

Tax benefit: Section 24
Limit: Up to Rs 1.5 lakh
Lock-in- period: For the duration of the loan

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