Section 80C makes life better

The new Section 80C of the Income Tax Act proposed in Monday's Union Budget gives you a bigger tax break than what the current regime offers.

It also affords better manoeuverability to avail of tax breaks.

Section 88, which will be succeeded by Section 80C, entitled you to a maximum of 20 per cent rebate on investments such as life insurance premia and provident fund contributions.

Along with it, Section 80L allowed deduction of interest earned on, say, a National Savings Certificate or a bank deposit up to a limit of Rs 12,000.

Now these are history.

In their place has come Section 80C  -- "u/s 80CCC, & u/s 80CCD", as the Finance Bill puts it.

So how is more tax relief available?

Against the current maximum 20 per cent rebate on tax payable, the amount invested (Rs 100,000 maximum) would now be deducted from your income.

So for those of you in the top tax paying bracket of 30 per cent, the immediate saving is Rs 30,000 -- if you invest Rs 1 lakh, that is.

The joy is greater for those with a taxable income of more than Rs 500,000 because they aren't even entitled to Section 88 benefits under the present regulations.

There's the icing on the cake too: no ceilings on specific categories. Here's how this helps. Under Section 88, you get a rebate on the principal of a home loan only up to Rs 20,000. Under 80C, you can use up the entire Rs 100,000 to repay your home loan principal.

And if you felt you were dishing out astronomical sums on school fees and getting a tax break only up to Rs 24,000, Section 80C provides succour --  the kids get a good education and you get a tax break too.

For punters, things couldn't get better. You can put Rs 100,000 in an equity linked savings scheme and end up getting a 30 per cent return upfront (in the form of a tax break in the highest slab).

The Budget proposals do not change the savings avenues, though. They would remain by and large the same in the next financial year starting April 1, 2005 -- life insurance, contribution to provident fund, schemes for deferred annuities, tuition fees, repayment of principal on housing loans, ELSS and infrastructure bonds.

The way to invest, therefore...

So while you can do a lot, think about it a little. For all you working people, contribution to provident fund (12 per cent of your basic salary) is mandatory and that's a good thing because your employer makes an equal contribution and you earn 9.5 per cent on the total.

Next, you must insure yourself to some extent -- so buy a pure term policy.

The trick here is not to opt for a unit-linked insurance plan but to pick up the cheapest term policy in the market and top it up with an ELSS.

A combination of a pure term policy and an ELSS is a sure-fire winner for two reasons.

First, the upfront charges for ULIPs are prohibitive -- between 20 and 40 per cent, depending on the nature of the schemes - -and sometimes these offset the tax benefit that you get.

The second is the 30 per cent upfront gain (tax break).

Therefore, assuming that the fund managers of both schemes are equally competent (and there is no reason to assume differently), the returns on an ELSS are likely to be far better -- they have returned around 40 per cent in the last few years. What's more, the dividends from ELSS, if any, would be tax free too. But remember that there's a three-year lock-in period for ELSS and ULIP plans.

Those who have a home loan...

For those of you who have no money to save but have a home loan, use the tax break for a higher principal amount.

Typically, the equated monthly instalment would have a higher share of interest in the initial stages and a higher principal component towards the latter half of the loan tenure.

The trick, therefore, would be to claim the tax break on as high a principal amount as possible.

If you're keen to save for the future, another option is the annuity plan, which you can pick up from any life insurer.

Earlier, you could only invest Rs 10,000 every year, but now there's no cap.

A ULIP annuity scheme could give you an upside in the form of higher investment returns from either debt or equity. If you are below 40 you could perhaps plump for an equity scheme, but if your older, debt schemes are a better bet.

Start with PPF

For the totally risk averse, there's the good old Public Provident Fund (it has a lock-in period of 15 years but you can borrow against your deposits after seven years) which earns you 8 per cent.

This is a great scheme to give your kids a headstart in life, so keep putting away small amounts for them. Till the government decides to tax the interest on PPF, that is.

Or stay with National Savings Certificates on which you earn 8 per cent.

If you can live with some risk buy into a pension fund set up by a mutual fund.

These funds invest in both debt and equity schemes though there's not too much of a choice right now with only Templeton and UTI offering these products.