Tax Saving instruments for year ending March 2012

Dear readers,

This is the time of the year when most of us get a call from the HR department to file our investment declarations so that appropriate TDS can be deducted from our monthly incomes. Consequently this is the time when we start thinking about tax planning (or tax saving to be more precise). Though tax planning is a round the year exercise, but its not late if you start even now. After all, investing Rs 1-1.5 lacs in about 35 days is not is not a tough job. But it might become a tough job if you do not have an idea about where to invest, what are the best investments which will satisfy your RETURNS-LIQUIDITY-SAFETY trinity. I will try to bring to your notice some of the simple and popular investment avenues (or any expenditures which can be instrumental in fulfilling the “tax saving” purpose of investment.

The Income tax department allows you deductions for various investments/expenditures under different sections all of which have different limits of tax deductions. We will first know about the investment avenues under various sections and then about the limits for these sections.

Under Section 80C (Limited upto Rs 1 lac)

Name Pros Cons
Tax saving FD with banks or post offices
  • Fixed and known rate of return
  • Most easy to do (in case your bank offers online banking, you can log in to transfer funds online. Also only comparison matrix is rate of interest, so bank offering highest rate scores, you compare interest rates here)
  • One time investment, no commitment to re-invest or investing each year
  • Lock-in period of 5 years
  • Interest on FD is chargeable to tax every year on due basis
  • Fixed rate of return across 5 years
  • These FD receipts are not readily accepted as security for availing loans
Insurance premium (including premiums for ULIP policies)
  • Ranks very high on safety aspects
  • ULIPs can give returns linked to equity/debt markets
  • A wide variety of products available to suit your needs viz family income protection, child education needs etc. Compare policy plans here
  • Can be used as a security for bank loans upto amount equivalent to surrender value
  • Medical check up is a must in almost all of the policies
  • Involves regular yearly commitment of premium amount
  • For beginners, it becomes difficult to determine the correct insurance plans
  • Some plans involve a very high cost
  • Lock-in period equivalent to the policy term
Employees Provident Fund contribution (salaried assesses)
  • Done by default for most of the salaries people
  • Earn fixed rate of interest
  • Doesn’t pinch you, as amount deducted from salary per month
  • Rate of interest fixed by Government every year, which is mostly lesser than going rate for Fixed deposit
  • Restrictions on withdrawals from PF account
Public Provident fund (PPF) for all individuals
  • Once you have a PPF account, its as easy as depositing money in bank account
  • Ranks high on safety aspect
  • Rate of interest fixed by Government every year, which is mostly lesser than going rate for Fixed deposit
  • Restrictions on withdrawals
  • Restrictions on depositing (cannot exceed Rs 70,000 per year)
Pension fund contributions (through salary or otherwise)
  • For salaried employees, deductions done on monthly basis, so doesn’t pinch
  • Safe investment
  • Fulfills pension needs as well
  • Rate of return not determinable as amount recovered only upon retirement either as annuity or lump-sum
National Saving certificates (NSCs) of post offices
  • Return of 60% in 6 years
  • Highly safe
  • Can be utilized effectively for security purposes in bank loans
  • Rate of return low compared to other investments
  • Lock-in period of 6 years
Equity Linked saving schemes (ELSS) of Mutual funds
  • Offers returns/risk linked to equity markets
  • Easy to do (again online subscription can be done if KYC formalities complied with and have an account with the required AMC)
  • Ranks low on safety aspect with no guarantee of returns
Other payments/expenditures
Repayment of housing loan
  • Principal component (only for self-occupied house) and interest component both are eligible for deduction
  • You will not take a home loan just for income tax deduction
Education fees of children
  • Fees paid to school, college or university in India for full time education
  • Limited to upto 2 children


Monetary limit

As written above, the upper limit for deduction under section 80C is fixed at Rs 1 lac. Thus total allowable deduction, combining all of the above instruments cannot exceed Rs 1 lac. You can have a combination of the above mentioned investment/expenditures to exhaust the limit (subject to individual limits on some of the instruments)

I like to mention here that I have listed only the popular and simple avenues above and not all of them. There are a number of clauses which might fit your case better. You can have a detailed list of the various deductions at Tax department’s website here.

There are a number of other sections under which deductions can be availed like 80D, 80E, 80G and so on. I will discuss these sections in next article.

Happy investing till then!! Thanks


Related posts:

  1. What’s New in Online Income Tax Return Filing for FY 2012-13 (AY 2013-14)?
  2. Using online tax calculators to have a fair idea about your savings and investments’ tax liability
  3. All you wanted to know about Rajiv Gandhi Equity Savings Scheme
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