Dipesh Majumdar

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Eight steps to avail maximum Tax benefit

March 14, 2012

Let me start with the disclaimer:

This article has relevance to all those salaried people out there in India. For others, this will give a generic idea only! However I would like all of you to read it to get a feel of the financial planning strategies I have discussed.
Key dates in a calendar year should be targeted to kickstart some of the activities you want to do as part of your goals. For example in an earlier post I had mentioned about saving Rs. 50 every day and making it a habit. I did the same starting from January 1'2012 and continuing till today (March 07'2012). It helps me keep a track of this SMALL act of saving I do everyday. Had I just started this randomly on any date, I would have lost steam because I could have never measured the benefit reaped as a result of this (NOT so painstaking) activity each day. Being able to measure the benefit however supplies the necessary motivation to go on and on ... And that's what the core philosophy of RAL (Repeated Action List) is all about! Keep on doing endlessly ...
March is about to end and so is another financial year. Starting 1st April 2012, we have a new financial year and we should target this to plan our financial activities. We can start with a list of what things to do and what to refrain from. I am stating one of the items here -
One of the items that is of utmost importance is to plan your finance and invest in a way that gives you maximum tax benefit. And this is the starting point of your financial planning. After you have cleared this stage, you should think about investing in shares, buying gold and jewellery or simply letting your money erode in your savings account. And yes, never ever think about that car! Car can wait. Cycle, walk, jog or simply take a bus, or at best a bike to work.
It is very simple but often ignored. New joinees (freshers) just passing out of their colleges leap into the world of office goers, excited with the prospect of owning that fat bunch of notes at the end of each month, which they had so dearly craved for all this time. They get money, spend, lend, give to their friends, relatives and parents, donate in charity and engage in a lot of activities, not realizing that they are missing out on a golden opportunity that could otherwise place them on the pedestal of prosperity and give them an edge to confront tough times ahead. Herein lies the need of a guide, a mentor, a financial coach or a friend who has already treaded the path and learnt the hard way! This article can be considered from that angle ... coming from someone who had learnt the hard way and who doesn't want the coming generation to repeat the same mistake. It is also applicable to those who have been earning for a long time now but have not a dime in the savings column.

So how do you plan your finance to ensure maximum tax benefit? Here it goes -
1. Calculate your epf component.
For this, look at your salary slip and compute how much is going to the epf/ppf. In case of any doubt, call the payroll of your company and get it clarified. For our example here, let us suppose that Rs. 24000 is going to your epf account. So we have the first component - efp (Rs. 24000).
2. Start a Life Insurance Policy and compute this component.
If you don't have a Life Insurance Policy then start one. Immediately. Talk to an LIC agent or a financial guru and find out your Insurance Plan. There are many in the market. Figure out how much you can invest per year. In this example let us say you can invest Rs. 26000 per year. So second component is - LIC (26000)
3. Invest the remaining amount in TAX Saving Mutual Fund.
Now you are already invested with 26000 + 24000 = 50000. Under section 80 C, you can save upto a limit of 100000 (Rs. 1 Lakh). So we are left with another Rs. 50000. This amount can be divided into 12 equal halves for one year. So 50000 divided by 12 (months) equals to Rs. 4167. That means each month (starting from April 2012 to next year March 2013), invest Rs 4167 diligently. Where? Invest in TAX SAVING Mutual Funds. You need a demat account for this. After getting a demat account, you also need to be KYC compliant for investing in MFs. I have a sharekhan account and personally find the website very user friendly for transactions in the share market.
4. Invest 20000 (Rs. 20000) in Infrastructure Bonds. Find out how. As for me, I have invested in IDFC Infrastructure Bonds from the same sharekhan account. Simple. Just a few clicks!
Congratulations you have just finished depositing 1 Lakh and 20 Thousand Rs in your Savings Column. This will save you the maximum TAX and also an ensured growth in future. You can liquidate the Tax saving MF's after 3 years. That means on the 4th year you will not have to arrange for this money to be invested in further MF's because by this time the MFs already invested in the 1st year would have matured. Bravo! Just keep recycling and enjoy TAX benefit free of cost from now onwards. Isn't that great? Also in case of Infrastructure Bonds, the cycle is 5 years not 3 ( in case of MFs).
Some of the other stuffs the salaried folks would also like to do in continuation with these 4 points are -

5. Show the medical bills (original) upto Rs. 15000. These will also be tax-exempted.

6. Insurance coverage for parents should be taken into account. If your parents donot have Insurance Cover and you are covering up their insurance by paying, say 12000 Rs per year. Show this amount with required documents as proofs. You get tax exemption here as well.

7. Show the rent receipts or Rental agreement.

8. If you have claimed LTA, show it.
These eight points complete your tax planning activity.

All these points 1 to 8, you can show it (or declare it) at the start of April (beginning of a financial year), if there is any facility available in your company to declare about these components. This is known as Tax Projection. If it is not available then enquire when and how you can declare them. In some cases the companies might ask about these data in the month of june-july. It is beneficial to declare about all these at the start of a financial year because this will give the payroll a guideline to deduct the tax component from your salary every month. If it is not done properly then more tax may be deducted from your salary and you might have to go through a lot of grinding to get back your money from the Income Tax Department. In any case, stay vigilant, keep in touch with your payroll and dont hesitate to question and clear your doubts. After all it is your money and you are the one at stake!
Just 2-3 months before the close of a financial year, during January may be, you have to furnish all your investments with proofs, i.e receipts, bill copies wherever applicable. If you fail to do so, then again you might end up paying more to the Income Tax Dept. 

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