It is January, and most companies would have asked their employees to submit their tax-saving proofs immediately. One of the common mistakes most tax savers make is they buy a product that helps them save tax without being sure what they can expect out of that product. For them, saving tax as a goal becomes more important than the potential benefits or returns the investment could provide.

Subsequently, tax savers who have not been able to make their investment in a tax-sensitive and investment-friendly manner will want to sell or close their investments as soon as possible. This would not provide the desired expectation out of the investment.

It is, therefore, important to include tax saving as a part of the overall financial plan. While taxes are inevitable, a smart tax plan will reduce the impact of tax on the income. When planning for investment in tax-saving products, one must consider the need, duration and amount of investment. There are some expenses also which provide tax benefit. The income tax act provides for tax savings under various sections namely Section 80C, 80CCF and 80D (Please see Table 1). We describe below the maximum and some smart tax saving plans to consider this year.

>> Consider the amount you need to save under section 80C: Salaried employee’s contribution to the employee provident fund (EPF) is an eligible tax-saving investment under Section 80C. As this is a compulsory deduction, this should be the first investment to be considered.

The choices mentioned in Table 3 are also available in case the EPF does not cover the full investment required.

The choice of investment should be made with respect to the overall financial plan of wealth generation and protection. The options also allow for a well-thought-out asset allocation strategy. (Please see Table 2)

Ulips: Unit-linked insurance plan (Ulip) is the only investment option that provides tax benefits, risk cover and market-linked returns. Also, any proceeds from such Ulip would come under the ambit of Section 10(10D).

ELSS: It is the tax-saving schemes of mutual funds. These funds provide a deduction at the time of investment and dividends and capital gains (on sale of units) arising out of income from ELSS are fully tax-free. ELSS also has the least lock-in period of three years.

Tax savers who are looking for a fixed income and capital appreciation should consider investment in PPF, NSC or tax savings bank deposits.

>> On fully utilising the deductions allowed under Section 80C, consider additional deduction under Section 80CCF: The income tax act allows for an additional deduction up to Rs 20,000 for investment in ‘long-term infrastructure bonds’ under Section 80CCF. These investments have a minimum lock-in period of five years and the investor is liable to pay tax on the interest received. Investment in these bonds can be considered as fixed income as they offer a fixed return of about 9 per cent.

It is suggested that investment in the bonds should be made only on utilising the deduction available under Section 80C as those investments offer benefits of market-linked returns, low lock-in period and a tax-free return in most cases.

>> With medical expenses on the rise, a health insurance policy is not only an important tax saving option but also an ideal tool that provides adequate health cover for family as well as ageing parents: Health insurance provides security against unanticipated hospitalisation expenses. The income tax act provides for additional deduction on purchase of health insurance. A maximum of Rs 35,000 is allowed as a deduction as under:

Rs 15,000: Premium for policies on spouse, children and self

Rs 15,000: Premium towards policies for dependent parents (Rs 20,000, if parents are senior citizens)

The above options provides an opportunity to make the most of the tax-saving solutions to take control of the basic goals of securing life, health expenses and wealth generation along with an asset allocation investment strategy. A smart tax planning should, therefore, be a part of the overall financial plan that can minimise the tax outflow and provide opportunity for wealth creation, protection and asset allocation for the overall financial objectives and long-term goals.

(The writer is the vice- president, product advisory group, ICICI Securities. Every Wednesday Financial Chronicle will invite an industry leader

to explain products, processes and issues of investor interest)