Dalal Street Investment Journal, Vol No 24 Issue No 20

STOCK GURU

CHAPTER: NINE

Investments for

Saving Tax

There are numerous tax saving schemes available, but it is

important to choose the scheme best suited to one's needs

and objectives

Some of the investments under Section 88 are:

KEY POINTS

a. Public Provident Fund (PPF)

b. Employee Provident Fund

� Do not invest in any tax saving scheme unless you are convinced

that the scheme will match your long-term needs.

c. National Savings Certificate (NSC)

d. Equity Linked Savings Schemes (ELSs)

� Tax savings schemes are illiquid and one should consider whether you

like MEP of UTI

can afford to block large chunks of money for a long duration

e. Unit Linked Insurance Plan (ULIP)

f. Premium of LIC

hich investments are available for saving tax?

g. Interest on Housing Loan.

In India, the income tax laws change frequently

and so do the tax saving schemes. Nowadays,

What is the best tax saving scheme for one's portfolio?

the government gives tax benefits under

Your choice of tax saving scheme will depend on your

Section 88 of the Income Tax Act on a number

objective. You can choose the scheme according to your

of schemes. Under Section 88, you will get a tax rebate of 20

savings. Identify your need and choose from the table given

in the next page.

per cent on all specified investments. For example, suppose

your total tax liability for the year 2006-07 is Rs.6,000. From

What should one consider before investing in any

your annual savings, you have invested Rs.10,000 in Public

tax saving scheme?

Provident Fund, which is a specified investment under Section

You may consider the following:

88. You get a tax rebate of 20 per cent of the investment, i.e.,

a. Do not invest in any tax saving scheme unless you are

Rs.2,000 on your total tax liability. Hence, you have to pay

convinced that the scheme will match your long-term

Rs.6,000 � Rs.2,000 = Rs. 4,000.

need. In schemes like ULIP, LIC, PPF, etc., you have to

invest every year to keep your account going.

Where should

What is your objective

b. All tax saving schemes are bad as far as liquidity is

you invest

concerned. Consider whether you can afford to block

Absolute safety with moderate return.

NSC

large chunks of money for a long duration.

Will not mind long term maturity

c. It is not worthwhile blocking large funds in tax saving

Absolute safety with much higher

PPF

schemes. For saving Rs.5,000, you have to invest Rs.

return but with longer maturity period

25000, which will be blocked for six years in National

Saving Certificates. Perhaps you may not be able to

Moderate Safety, slightly less maturity

Equity Linked

sacrifice that liquidity. You may alternatively, pay the tax

with a scope for even higher return

of Rs.5,000 and put the balance Rs.20,000 in slightly

Savings Scheme

risky investments like mutual funds or shares and earn

Primary objective is not investment but

Life Insurance

more return in a year. It is better, therefore, to invest a

security of the future for others.

part of your savings in such schemes and pay some tax to

Tax savings and return objectives

gain liquidity. After all, if you have all the paper money

though important, are secondary

saved for the future, will you enjoy the present?

d. With frequent government policy changes, those who

Same as above but slightly shorter

ULIP

are investing in long maturity tax savings, always run the

duration and less return

risk of losing a part of the stipulated return, in case the

Very high return. Do not mind taking

Build a house with

new tax law does not benefit them.

risk but unwilling to sacrifice liquidity

HDFC loan pay tax

e. For comparing the return on any scheme, consider

for long maturity periods.

and invest remaining

the post-tax return, because tax saving is our gain. For

savings in shares.

example, suppose you invest Rs.10,000 in NSC, it will

Sept 14 - 27, 2009

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Dalal Street Investment Journal