Learning to play with tax-saving instruments

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SummaryInvestments into tax instruments should ideally start at the beginning of the year. So, here’s a look at all the tax saving schemes, including the newly introduced RGESS

It’s that time of the year when those in the salaried bracket try and wrap-up their choice of the best asset classes to invest in, primarily with a view to save on taxes. Commonly termed as JFM (or January February and March) in the banking industry parlance, the three-month period is when financial services firms actively push equity-linked saving scheme (ELSS) of mutual funds, insurance plans and fixed deposits schemes that qualify for tax benefits. So, it definitely pays to be aware of all the available options.

Under Section 80C of the Income Tax Act, the government allows individuals to claim tax benefits on an amount of up to Rs 1 lakh and if you fall in the highest tax bracket, then you can save up to Rs 30,000 in taxes. Other than the EPF contributions and principal component of home loans, investment avenues such as PPF, ELSS of mutual funds, insurance schemes, fixed deposits of banks, NSC of post offices are some other options.

This year the government has also introduced the Rajiv Gandhi Equity Savings Schemes (RGESS), where investors can claim additional tax benefits on investment of up to Rs 50,000 in the qualifying instruments — direct equities and mutual funds.

The ideal tax-saving approach

Ideally, the planning that goes into investments into tax instruments should start at the beginning of the financial year. Not only does it reduces your burden towards the end of the year, it also helps your money to accumulate some gains over the period. For example, if you know that you have to invest Rs 60,000 in ELSS schemes of mutual funds, then rather than investing the entire amount at the end of the year you can do it as an SIP beginning April (first month of the financial year) and stagger your investment in 12 equal installments of Rs 5,000 each. It would reduce your burden to save for tax investment and will also accumulate gains. Even if you have to invest in PPF or bank deposit the same approach can be adopted.

In the current financial year, if you had invested Rs 5,000 per month in an ELSS in an SIP beginning April 2012, then even at the returns levels offered by the benchmark BSE Sensex, your investment amount of Rs 45,000 (Rs 5,000 for 9 months between April and December) would have grown to Rs 50,165. Experts say that if you know

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