Saving Tax and creating Wealth too !

The end of FY06 is arriving and most of the companies have issued timelines for employees to submit proof of Investment done for tax saving purposes. Most of us really do not really plan our tax saving avenues in a manner we think of our other Investments. It’s more of saving the taxes rather than utilizing the same money to generate higher returns.

Let’s talk briefly of the various avenues available for tax savings and find out where one should invest his or her money to get best of both worlds.

The enabling Section 80 C

One nice thing about the last finance bill was the removal of restrictions from upper limits of various investing avenues and freedom was given to invest in the eligible avenues subject to overall limit of Rs 100,000.

So, from the avenues given below, a tax payer can choose to invest in any avenue subject to a maximum investment of Rs. 100,000 to get deduction under Sec 80 C.

Avenues for Investment under Sec.80C

1. Contribution to Provident Fund

2. Repayment of Principal amount on Housing Loan

3. Payment of tution fee

4. Investment in PPF

5. Payment of Life Insurance Premium

6. Investment in NSC

7. Investment in Tax saving FD’s

8. Investment in Infrastructure development funds

9. Investment in Equity Linked Saving Schemes

Out of the above, Contribution to Provident fund is something in which most of us are already investing (deducted by employer) monthly. So out of the Rs.100,000, reduce the amount that would be deducted by the employer on account of your portion of contribution to Provident fund.

For those of us, who have school going children, Payment of tution fee is also considered for Sec. 80 C benefit.  Life Insurance and Tax savings

As far as life insurance is concerned, endowment plans (money back plans) have been a popular source of investing. However, ULIP’s have taken a center stage now since they offer insurance as well as market related returns in a single product. However, investors should understand the underlying structure of ULIP carefully since these offerings have a substantial charge towards expense in the initial years and is advisable only for investors with a large investing horizon.

Another avenue within insurance domain is Pension plans. Pension plans have got a boost in last finance bill with the overall limit raised from Rs. 10,000 to Rs. 100,000.

Let me disclose one thing here. I am biased towards other investing options as compared to Life Insurance products since I believe that insurance and investments should be taken separately. So while investing don’t think of insurance and while insuring yourself don’t think how much return you would generate from the Investment In India in insurance. As far as insurance needs are concerned I believe in pure risk plans which cover your insuring needs at an affordable premium. However, these are my personal views and each one of you has a right to differ from this.