It’s that time of the year when everyone rushes to invest to save tax. Lessons from a few families:
Sandeep Shanbhag is lamenting that his client, Sharad Wagh, lost the opportunity of using the Senior Citizen Savings Scheme wisely. Wagh used up the entire Rs 15 lakh limit in one go. Consequently, the 70-year-old semi-retired IT consultant will have to explore other options to save tax. With an annual income of Rs 5 lakh, he comes under the 20 per cent income tax rate bracket.
Shanbhag’s prescription: Invest up to Rs 10 lakh in the first year, and then, follow it up by investing Rs 1 lakh every year for the next four years. Thus, an investor can claim tax benefit for Rs 1 lakh under Section 80C of the Income Tax Act each year for the full five-year term. Also, “Put Rs 5 lakh in senior citizen bank fixed deposits of different maturities. It will ensure the remaining money is not idle,” adds Shanbhag.
What will help Wagh is the medical insurance policy he bought years back. He is already getting a Rs 20,000 tax benefit.
One tax-saving strategy for Wagh is investing in the Public Provident Fund (PPF) account, on behalf of his elder daughter. He can club his own PPF investments (Rs 70,000) with that of his adult daughter’s (Rs 30,000) and claim a rebate of Rs 1 lakh, instead of just Rs 70,000. However, in case of a minor child, the investment cannot be claimed separately.
Under Section 80C, individuals can claim a total tax rebate of Rs 1 lakh by investing in a range of investment options — PPF, principal amount of home loan payments, bank fixed deposits, post-office term deposits, Senior Citizen Savings Scheme, basic tuition fees for children, equity-linked saving schemes and even insurance plans.
According to Radhika Gupta, co-founder, Forefront Capital Management, “Products that help you save tax will not make good investment sense, unless these help in meeting your financial goals.”
This advice stands true for 40-year-old Sunita Gohrani. With no dependents to look after, the interior design consultant, who is in the highest tax bracket, confesses she pays little attention to tax saving while investing.
“I have been investing Rs 5-6 lakh a year in unit-linked insurance plans (Ulips) simply because the mandatory lock-in period ensures I stay invested,” she says.
Financial planner Hema Moryani wants Gohrani to review these and divert some money into other asset classes, such as equities, exchange-traded funds and PPF, if Gohrani wants to safeguard her corpus and fulfil her goal of an early retirement.
“Some of Gohrani’s Ulip investments are offering little life cover or are giving negative returns,” Moryani says.
Gohrani is also advised to enhance her medical cover (for which she pays Rs 12,000) by taking a critical illness cover. As a by-product, she would be eligible for tax benefits up to Rs 15,000, under section 80D.
With a wife and a seven-year-old daughter as dependents, Amit Athawale is also working towards building his retirement corpus. At present, Athwale has enough scope to invest in tax-saving instruments. He has been availing tax rebates on both the interest and principal component of his home loan, besides investing in PPF.
Athawale has a medical policy offered by his employer. He is advised to buy a family floater policy to claim a tax benefit of Rs 15,000 under Section 80D.
According to experts, employees need to realise medical insurance offered by employers ends when the employment ends. Even if the person was to retire with the same company, getting a new policy at that age is difficult.
Additionally, investing Rs 20,000 in the infrastructure bonds this year could get Wagh a tax benefit of Rs 4,180 and both Gohrani and Athawale tax benefits of Rs 6,180.
