How to save tax in 2013: Your guide to planning

The most important rule of tax planning is that it is no different from financial planning. The Section 80C offers a wide range of options, each suited to a different need. Choose an option that fits into your overall financial plan, not because it offers good returns or your brother-in-law is selling it. It is easier to identify the best option if you do not leave tax planning for the dying days of the financial year. You get a rough idea of how much you need to save at the beginning of the fiscal year. Allocate your Rs 1 lakh limit across different Sec 80C options as dictated by your financial goals, following the same principles of asset allocation that apply to other investments. Taxpayers can take a leaf out of Ramakant Mishra's book. The Belapur-based PSU bank employee wants to save for the education and marriage of his two daughters. Given that these goals are a good 15-20 years away, he has been advised to invest in diversified equity funds. So, he has started a monthly SIP of Rs 3,000 in an ELSS fund, thus aligning his tax-saving investment with a long-term financial goal. "I chose to put money in the ELSS fund because it serves a twin objective in my financial plan," says Mishra. ARE YOU READY FOR RISK? That's good thinking on Mishra's part, but allow us to slip in a caveat here. ELSS funds invest in stocks and carry the same risk as any other equity fund. In fact, the risk is greater because you can't touch the investment before the three-year lock-in period. Besides, it is best to invest in equity mutual funds in monthly driblets. Investing a large amount at one go may have been a good strategy when the Nifty was floundering at 2,700 levels and a PE of 11-12 in early 2009. But it would be hara-kiri to do so when the index has crossed the 6,000 mark and is trading a tad above its long-term average PE of 18. Also Read: Six tax goof-ups to avoid For small investors, this is the time to be fearful rather than greedy. They should not attempt to get on to the ELSS bus nowat least not in a lump-sum mode. In the same context, the newly launched Rajiv Gandhi Equity Saving Scheme is best left untouched. It gives additional tax deduction to first-time investors who want to enter the equity market. Instead of taking this route, which will give them only 50 per cent deduction, the ELSS funds are a better option. We have identified six of the best ELSS funds for you. These may not be the best performing funds, but have a stable track record. If your risk profile allows you to invest in these funds, stagger your investments across 2-3 SIPs between now and 31 March. HOW NOT TO INVEST IN ULIPs The same logic applies to investments in Ulips. Putting a lump sum in equity through a Ulip is risky. This is especially true in case of single premium plans, where you put a huge amount in the market at one go. The good thing is that unlike the ELSS funds, Ulips allow you an alternative asset allocation model.

If you are paying a large premium, put your money in the debt option instead of the equity fund in the Ulip. You can then gradually shift small amounts to the equity option. Most insurance firms allow 10-12 switches free of charge in a year. The new Ulip, introduced after Irda's 2010 guidelines, is more customer-friendly and transparent. Unfortunately, however, the capping of the charges has led agents to avoid these low-commission plans. In 2011-12, barely 15 per cent of the total premium from new policies came from Ulips, down from almost 75 per cent in 2007-8. Admittedly, these market-linked insurance plans are not the best investment option in the market today. Other investments can yield the same results at a lower cost. ELSS funds are a simpler and cheaper option for wealth creation. You can save tax through 5-year bank FDs or PPF as well, and a term plan gives you a bigger insurance cover at a lower price. Also Read: Choose an insurance policy like you would a life partner What Ulip bashers overlook is the convenience of bundling everything into a single product. You get equity exposure, tax deduction, tax-free income and can switch your allocation as per your reading of the market. Even so, a Ulip should not be your first insurance policy. This investment-cum-insurance plan should be bought only if you have purchased enough insurance (roughly 5-6 times your annual income) with a pure protection term plan. Similarly, avoid putting large sums into your NPS account, especially if you have an aggressive portfolio. Even though the NPS follows a prudent asset allocation, it's best not to get caught on the wrong foot. The January-March quarter has traditionally been the busiest for the life insurance sector. Almost 70 per cent of the total business is transacted during these three months because the taxman is the most effective insurance salesman. If you plan to buy an insurance policy to save tax this year, keep in mind the changes in the tax rules relating to life insurance. An insurance plan will be eligible for tax deduction and the income will be tax-free only if it covers the policyholder for 10 times the annual premium. Till last year, policies were required to offer a cover of five times the annual premium for tax breaks. The clause introduced in Budget 2012 will further bring down the returns from traditional policies. these policies gave very low returns of around 5-6 per cent. Now, this is likely to fall to roughly 4-5 per cent. This is because a larger life cover would require a bigger sum going into mortality charges every year. Also, the service tax rate has been enhanced.