Like each year it is time again to submit the investment declaration for claiming your tax deductions. It is time to manage your benefits under section 80C. Here is a guide to help you wade through the various options and ensure the following;

1. Tax is saved and that you claim the full      benefit of your section 80C benefits
2. Product are chosen based on their long term     merit and not like fire fighting options     undertaken just to reach that Rs. 1 lac     investment mark

3. Products are chosen in a manner such that multiple life goals can be fulfilled and they are in line with your future goals and expectations
4. Products that you choose help you optimize returns while you save tax in the immediate

Step 1: Assessing the gap

The foremost thing to be done is to assess how much money you still need to invest to reach and fulfil the Rs. 1 lac section 80C limit. The starting point for this could be your tax projection working available to you from the HR or payroll division of your employer. Look at what you contribute towards the employees’ provident fund or EPF or PF as it’s commonly known. For those in a high income bracket if this contribution is going to be adequate to reach the Rs. 1 lac mark – then obviously there is no more tax planning to be done. However if you see that you are going to contribute say about Rs. 40,000 into the PF then you know for sure that you have before you the task of planning the balance investment for Rs. 60,000. This Rs. 60,000 is your tax investment gap or the proposed allocation to be done towards claiming section 80C benefits in addition to the statutory benefits.

What is important is to get things right each year and not buy into products last minute. If you leave this for the last minute quite likely that you would make rash decisions which will add little or no value going forward.

Step 2: Existing commitments

The next thing to be done would be to calculate your total pre-existing commitments – such as payment of insurance premiums, payment of premiums for pension policies, payment of principal towards housing loans (if you have a housing loan) – this principal would be a part of the EMI you pay to the housing finance company. Ask the housing finance company for a break up of the current financial year’s interest and principal payment. At this stage itself it is quite likely that many people would reach the Rs. 1 lac investment threshold. If you do then there is no more allocation required from your end.

If you still have not reached the Rs. 1 lac mark – then your options are ELSS, NSC, 5-year FDs, PPF etc.

However please note that this is actually where real tax planning kicks in. Going by the steps above you have done basic tax management but you have not really optimised it. You worked hard to get what you wanted in life. With radically changing income tax rules tax planning may seem like an ordeal. But this is where we must act prudent else in the not too distant a future you might think about missed opportunities to invest and diversify to save on tax.

Step 3: Real Planning

So far with whatever you have done in the past it is important to understand the future implications of your tax saving strategy. You cannot do much about the statutory commitments and contribution like PF but all the rest is in your control.

Let us take insurance to begin with – If you have a traditional money back policy or an endowment type of policy understand that you will be earning about 4%-6% returns on such policies. This will be lower or just equal to inflation and hence you are not creating any wealth – infact you are destroying the value of your wealth rapidly. Such policies should ideally be restructured and making them paid up is a good option. You can buy term assurance plan which will serve your need to obtaining life cover and all the same release unproductive cashflow to be deployed into more productive and wealth generating asset classes – ELSS is a good route to take here. If you are young under 35/40 years of age ULIP may be an option for another 4-7 years however ELSS is the best.

PPF – This has been a long time favourite of most people. It is a no-brainer and hence most people prefer this but note this. The current returns are 8% and quite likely that sooner or later with the implementation of the EET regime of taxation – investments in PPF may become redundant. How this will be implemented is no clear hence best option is to go easy on this one. Simply place a nominal sum to keep your account active. EET may apply to insurance policies as well.

Pension policies – This is the greatest mistake that many people do. There is no pension policy today which will really help you in retirement. Period. That is the cold fact. ULIP pension policies may help you to some extent but I would give it a rating of 4 out of 10. The problem with pension policies is that you will get a measly 2 or 4% annuity when you actually retire. To make matters worse this is taxed at full rate as well. ULIP pension policies will help you a bit as they will generate a larger corpus than traditional policies – but that’s it. No insurance company or agent will agree to this – but this is a cold fact. Steer clear of such policies – either make them paid up or stop paying ULIP premiums if you can. Divest the money to more 5 year FDs, NSC, other bonds etc – These products are fair if your risk appetite is really low and if you are not too keen to build wealth. Generally speaking in all that we do wealth creation should be the underlying motive.

ELSS – This is one really good option. You save tax – returns are tax free completely – you get to build a lot of wealth. However note that this is fraught with risk. Though it is said that this investment into an ELSS scheme is locked-in for 3 years you should be mentally prepared to hold it for 5-10 years as well. It is an equity investment and when your 3 years are over – you may not have made great returns. If that be the case you will have to hold longer and surely you will make super normal returns. Strange as it may seem the riskiest investment has the least tax liability – infact it is nil.
Specified pension schemes – This is another good alternative for people seeking mediocre risk. Such pension schemes are floated by mutual funds. These work like hybrid or balanced funds where the equity allocation may be in the range of 40 to 50%. There will be a long term capital gain on this but given the returns that are likely to be generated such capital gain tax will not pinch.

There is so much to be done while you plan your tax. Look at 80C benefits as a composite tool - look at this as a tax management tool for the family and not just yourself. You have section 80C benefit for yourself, your spouse’s 80C, 80C for your HUF, parents 80C and 80C of father’s HUF. There are so many Rs. 1 lac to be planned and hence so much to benefit to be reaped from good tax planning.

Tax planning is very strategic in nature and not like the last minute fire fighting most do each year. Think before you put down your investment declarations this time around.