As we are nearing the end of the financial year 2011-12, it is time to take notice of our tax liability for the year. Here’s some last minute tax saving advice for those of you who do not want to lock in money for long time but still get tax saving benefits.
Don’t want to lock-in money for long? Choose among ELSS (tax saving mutual fund scheme), NSC (National Savings Certificate) and 5-year tax saving bank fixed deposits (FDs):
* 5-year average CAGR of Sensex; **Tax (slab) rate considered for calculation is 30%; *** Inflation assumed at 8%
^ Pre-Tax return on 5-year Bank FD is as per the current prevailing rate.
Investment in the above tax saving schemes should be made as per one’s life-cycle stage in order to take full advantage of the tax saving benefits. An example will make it simple to understand –
Example - Suchit, a 28 year old, works as a Relationship Manager in ICICI Bank, Bangalore. His salaried taxable income for the FY (Financial Year) 2011-12 is Rs 8 lakhs. He is single with no dependents. He hasn’t made any tax saving investments yet and is looking for some last minute advice.
Analysis – Suchit’s current tax liability comes to Rs 94,760. By fully making use of the section 80C tax saving deductions, Suchit should be able to bring down his tax liability by Rs 18,540!
Given his age and the fact that currently, he has no dependants, Suchit should consider investing a majority of his tax-deductible amount (Rs 80,000) in Equity-linked mutual fund schemes (ELSS), as it will maximize returns that add to his wealth, and will provide to his portfolio the required hedge against the inflation monster. Investing the balance (Rs 20,000) in a mix of Fixed Income products like NSC and 5-year tax saving bank FDs will provide safety and allow him to accumulate funds for short/medium term needs (such as marriage, buying a car or house, giving to charity, etc.).
Suchit should also consider purchasing a health or medical insurance policy in his name. This not only acts as a financial shield in case any unexpected incident happens to him but also provides additional tax saving of up to Rs 15,000 p.a. under section 80D.
Author: Priya Rao
Tax Calculator India 2011
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