There’s hardly anything to understand about Tax planning instruments available to save tax, as almost every tax payer knows it. But every year there comes number of articles and lot of discussion happens on to which tax saving instrument one should invest in. and this year it requires much more debate because of the recent announcements on Small saving Instruments and to be announced Direct tax code, which might get delayed this year also. Changes in the small saving schemes space will impact the overall savings scenario as more than half of the tax saving investments goes into these instruments only. To make clear for readers with small saving schemes I meant by instruments like Public Provident fund and national savings certificate etc. Let’s check the changes that are going to impact your tax planning this year.(Also Read – Tax Planning customised)
From now on small savings rate will be announced every year and linked to the Government securities rates. All 5 year schemes like Post office monthly Income scheme (POMIS), National savings Certificate (NSC), Term deposits will be linked to 5 year Government bonds and all 10 years or more tenure products will be linked to 10 year government bonds.
- Public Provident fund (PPF) investment limit has been increased from 70000 to 1 Lakh and interest rate also has been increased from 8% to 8.6%. So prima facie increase in interest rate looks a good thing but in real even they have made PPF a market linked product.
- National Savings Certificate (NSC) for 6 years has been reduced to 5 years & new NSC for 10 years has been introduced. This year’s 5 year NSC rate is 8.40% and 10 year NSC is 8.70% .Even here interest rates are made market linked similar to PPF.
As you can see that where one should be happy that there most favored tax saving instrument’s i.e. PPF limit has been increased, there the fix interest rate which it used to provide for so many years has been linked to Government securities.
This is not the only concern for a tax saver , one should be wary of the provisions of the proposed direct tax code also before deciding on which tax saving instrument one should opt for and why. It is highly unlikely that DTC will come in affect from 2012 but still it will be there in visible future. Let’s see what the changes that are expected after DTC are.
- Only PF, retirement or gratuity funds, Pension funds or Anything else specifically approved will be available for claiming deduction of Rs 1,00,000/- which is available u/s 80C at this moment.
- An additional Rs. 50,000 is deductible under 3 heads – and limit for all of them added up. It includes
Pure life Insurance – defined as any policy where the premium is less than 5% of the sum assured for ALL years of the policy,
Health insurance – for self and parents
Two children’s tuition fees (including pre-school fees), but no donations or “development fees” included.
All this means that all other savings which as of now available will become history. Like there will be no ELSS, no NSC, No Term deposit, No principal payment of housing loan etc. But if it gets applied as it is then it is quite clear that among small saving instruments only Public provident Fund will be there.(Also Read Tax Planning case Study)
How to select Tax saving instrument?
Your tax Planning should always support your overall financial Planning. If you have done your investment planning carefully, then your tax planning will follow. One should select instruments in such a way so that it helps in achieving the other long and short term goals. Looking at the proposed DTC provisions it is quite clear that government wants people to invest for long term and be adequately insured. And with changes in small saving space it is also clear that government wants people to Plan themselves and as per there requirement. This is where financial Planning comes into the scene. It’s always better to fix onto your goals and select instruments that help in achieving those goals comfortably. Use tax saving investment instruments for your long term planning like retirement or children education/marriage. You can use instruments like New pension Scheme (NPS) and PPF for this requirement. Through NPS you can get the necessary equity exposure required for long term savings. Salaried persons may also increase the Employee provident fund contribution. Purchase only that insurance policy where the sum assured is at least 20times of your annual premium. Better to go with a term plan. (Read – Tax Planning Customised)
This year you may purchase those instruments which are one time investments like ELSS or NSCs or 5 year fixed deposits. But before entering into long term commitment with products like Insurance policy or housing loan you have to keep the proposed changes in mind. Although this is somewhat clear that DTC provisions will get applied on prospective and not retrospective basis, but what’s the harm in taking precautions, as they say “Better safe, than Sorry”.