How to get rich by tax planning.....

How to get rich by tax planning......
Source: outlookmoney

Two types of people complain about taxes: men and women. Every year, taxpayers try to save and invest so that they minimise taxes and maximise disposable income.
Tax planning, as part of your overall financial planning exercise, helps you figure out how to make full use of the breaks on offer.
The ideal time to plan your taxes is in April, at the beginning of the financial year. But for those who couldn't and are doing so now with just about four months to go for the year to end, there are still enough investment options that would substantially lighten the burden while deploying funds profitably.
Investment-related tax breaks: Finance Bill 2006-07 offers a deduction from income of up to Rs 1 lakh (Rs 100,000) on specified investments, expenses or payments like notified bankdeposits with a minimum period of five years, life insurance premiums, Employees' Provident Fund (EPF), public provident fund (PPF), repayment of principal amounts on housing loans, payment of tuition fees, national savings certificate (NSC) and equity-linked savings schemes.
Bank deposits: The term deposits in a scheduled bank with a minimum period of five years under the Bank Term Deposit Scheme, 2006, in addition to giving you a fixed and assured return (around eight per cent) comes with a tax advantage. There is a one-time investment and there is no commitment to pay in future. Since the benefit of Section 80L (interest income up to Rs 12,000 from bank deposits and NSC were exempted) has been removed, the entire interest income from any such deposits would be taxable.
State Bank of India (SBI) and HDFC currently offer 7.25 per cent interest over five years, while ICICI Bank offers 7.5 per cent.
EPF: This is a forced saving that happens in the life of an employee and helps him save for retirement. Twelve per cent of your salary is deducted every month and put into a kitty maintained either by the government or your company's trust. The contribution currently earns a tax-free return of 8.5 per cent and is fixed by the government every year in March-April.
PPF: This is a self-directed investment option. It is essentially a 15-year investment that carries a tax-free interest rate of eight per cent as of now. The rate is subject to change. Investments of Rs 500-70,000 qualify for a tax rebate under Section 80C.
Home in on home loans: The interest payable on home loans taken on or after 1 April 1999 is tax-deductible up to Rs 1.5 lakh a year. If you factor in the tax advantages, the effective interest rate works out to 6.3 per cent for an eight per cent loan -- against which you get to build a long-term asset. Those eligible for Section 80C benefits stand to gain even more. The total amount eligible for deduction under this section is Rs 1 lakh a year. and principal repayment of home loans up to that amount also qualifies.
Children's fees: Under Section 80C, parents can also claim a deduction for tuition fees -- up to Rs 12,000 per child -- for a maximum of two children. This means that parents with two children can claim a deduction of Rs 24,000. However, any payment towards any development fees or donation to the institution are excluded.
National Savings Certificates: For those who are less averse to risk, there's the National Savings Certificate. This government-backed security is available at post offices and comes with an interest rate of eight per cent, compounded half-yearly as of now. The interest is entirely taxable and is right for those in lower tax slabs with an investment horizon of around six years.
Equity-linked savings schemes (ELSS): It is eligible for a deduction under Section 80C. By investing in these schemes, those with a penchant for risk stand to gain from the benefits of equity market returns. Do note that like all tax savings options, these plans have a lock-in period of three years. ELSS does not allow moving out of the investment in case of market volatility, unit-linked insurance policies (Ulips) allow this, through their switching facility.
Life insurance: The premium that you pay towards a life insurance policy is eligible for a tax deduction up to Rs 1 lakh under Section 80C. If the premium paid in any of the years during the term of the policy is more than 20 per cent of the sum assured, then deduction will be allowed only for premiums up to 20 per cent of the sum assured.
This applies to all term, endowment or unit-linked plans bought from any of the 14 private life insurance companies as well as from LIC.
Health insurance: Under Section 80D, medical insurance premium of up to Rs 10,000 is tax-deductible, with an additional deduction of up to Rs 5,000, where the premium is paid by a senior citizen (65 years or older).
Pension plans: If you have a pension plan with a premium of more than Rs 10,000, you can now claim that under Section 80CCC. If any investment has been made under this section, then the qualifying amount under Section 80C will stand reduced to that extent.
What to do: Risk and return have a close relationship with each other and is an important pillar in building wealth over a long time. An investment under Section 80C is a step towards that. Removal of sectoral caps this year on investments for tax-planning purposes means that investors can invest in line with their risk appetites and needs.
However, investments in tax instruments should never be done merely to save taxes. The choice of an instrument is as important as the amount of tax saved. Liquidity is a crucial factor in all the instruments and, hence, short- and long-term objectives should be clear before you lock your funds in them. the value derived through liquidity, returns and security over the next few years should be an integral part of your investment decision.
If your immediate need is only to save taxes and your investment horizon is not very distant, then ELSS would be suitable. Remember, the risk involved is high too. If you can commit to pay regularly for a longer duration, ULIP would be a better option. A risk-averse investor can select small savings schemes like PPF or the bank deposit with assured return on investment.
Finally, having made your investments and claimed the tax breaks, don't forget to keep the records and documents of your investments and tax deduction certificates, since you will have to attach them with your returns.