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Over the next 90 days, millions of Indian taxpayers will wrap up their tax planning for 2011-12.

Unlike in the past, this year's tax planning will be quite different as not only have the rules

changed, but many of the goal posts have also shifted.

The biggest change is that the favourite tax-saving instrument of risk-averse investors has now

become market-linked. The Public Provident Fund (PPF) will give returns that are 25 basispoints above the benchmark yield of the 10-year government bond.

Then there is the Direct Taxes Code that may come into effect from April this year. There is

also a small, but significant, change for senior citizens.

Last year's budget lowered the age limit for senior citizen taxpayers from 65 to 60. It also

introduced a new category of very senior citizens above 80 with a big exemption of Rs 5 lakh.

Despite these alterations, some fundamental principles of tax planning remain unchanged.

Your tax planning should still be guided by your overall financial planning. "Don't go by

advertisements because not all tax-saving investments will suit you," says Mumbai-based

financial planner Kalpesh Ashar.

Your choice of instruments should depend on how soon you need the money, your

expectations of returns and ability to take risk. Let us look at the instruments that different type

of investors should have in their tax-saving portfolio this year.

Take the ELSS advantage: For the taxpayers who embraced market risk by investing in

equity-linked savings schemes (ELSS), this may be the last year for investing in this category.

The DTC has not included ELSS in the list of tax-saving options. These funds have the shorte

lock-in period of three years among all Section 80C instruments. So, your funds are not tied up

for five years as in fixed deposits (FDs) and National Savings Certificates (NSCs).

"Given the three-year lock-in period and the level at which the markets are now, it is unlikely

that an investor will lose money by investing in ELSS," says financial consultant Surya Bhatia.

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The low minimum investment in

these funds (you can start with as

little as Rs 500) makes them an idea

stepping stone for the rookie

investor.

However, don't forget that ELSS

funds can be risky. So invest

systematically rather than in a lump

sum. Remember, you have to invest

the money before 31 March.

"There is a lot of uncertainty in the

market now and it is best to exercise

caution and stagger investments inELSS funds," says Ajit Menon,

executive vice-president and head o

sales and marketing, DSP BlackRoc

Mutual Fund.

Investors can also opt for equity

exposure through Ulips. Unlike ELS

funds that cannot be touched during

the lock-in period, these insurance-cum-investment plans allow

policyholders to tweak the equity an

debt allocation according to the market conditions. The New Pension Scheme also gives equit

exposure, but this is limited to a maximum of 50% of the corpus.

Save extra Rs 9,270 through the PPF this year: The overall limit for investing in the PPF ha

been raised to Rs 1 lakh now from Rs 70,000 earlier. For someone in the highest tax bracket,

this enhanced limit of Rs 30,000 means a potential tax saving of Rs 9,270 a year. "By itself, thPPF is a good long-term investment option, even if it is not done because of tax planning," say

Bhatia.--------------------------------------------------------------------------------------------------------------------------------

Lock into tax-saving FDs at high rates : For the taxpayers who shy from market risk, fiveyear FDs are the only remainin

true fixed income tax-saving instrument.

Even long-time favourites, such as the PPF and NSCs, have become market-linked. Even if the 5-year benchmark bond

yield moves up to 9%, NSCs will offer an interest rate of 9.25%. Banks are already offering higher rates of 9-9.5%. For

senior citizens, theSenior Citizens' Savings Scheme has become a little attractive.

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It will offer an interest rate of 100 basis points above the 5-year government bond yield. But again, tax-saving FDs appear

better bet because banks offer senior citizens a 25-50 basis points higher rate of interest. Be careful with insurance:

For those who flocked to Ulips and insurance policies, there is uncertainty looming on the horizon in the form of the DTC.

Under the DTC, insurance plans that don't give a life cover of at least 20 times the annual premium will not be eligible for

deduction.

While the DTC is yet to be passed, there is no clarity for now on the new rules for tax deduction and taxability of insurance

income.

These are among the various issues you will need to grapple with when you decide your Section 80C mix for this year. An

early start allows you to make an informed decision. Leave everything for the last few weeks of the financial year and you

are likely to make a suboptimal choice in your hurry to beat the 31 March deadline.

ET Wealth takes a look at the various investment options under Section 80C and explains the pros and cons of each of

these investments.

EMPLOYEE PROVIDENT FUND

This compulsory deduction is also an automatic tax saver. Your monthly contribution to the EPF is eligible for tax deductio

under Section 80C. The best part is the tax-free corpus. The only hitch is that you cannot access this money till you retire.

a subscriber is diligent, even if he gets a modest basic salary of Rs 25,000 at 25 years, and a 10% raise every year, his EP

will make him a crorepati by the time he retires. So, don't give in to the temptation of withdrawing your PF while changing

jobs.

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If you do this within five years of joining, not only will the withdrawn amount be taxed, even the tax benefits availed of in th

previous years will be reversed. Some companies offer consultancy jobs with no EPF contribution. While this pushes up th

take-home income, the employee is denied a crucial safety net and the chance to build a tax-free retirement corpus.

PUBLIC PROVIDENT FUND

This option has become even more attractive after the interest rate was benchmarked to the

10-year government bond yield. This year, the PPF will earn 8.6%, 25 basis points above the

average benchmark yield in the previous fiscal. The rate will be determined by the yields of gilt

securities in the secondary market. This will ensure that the PPF returns are in line with the

prevailing market rates.

The annual investment limit has been raised from Rs 70,000 to Rs 1 lakh. Both these changes

mean that the PPF investors can build a bigger corpus in the 15-year period. While individuals

can extend their PPF accounts beyond 15 years in blocks of five years, HUFs will no longer be

allowed this facility.

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When you invest in the PPF, the interest is compounded annually, but calculated monthly on

the lowest balance between the fifth and the last day of every month. If you invest before the

fifth, the contribution will earn interest for that month too. Keep in mind that you must invest at

least Rs 500 in the PPF during a financial year or pay a penalty.

NSCs AND BANK FIXED DEPOSITS

Like the PPF, the interest on NSCs has also been linked to the government bond yield in the

secondary market. The tenure has also been shortened by a year to five years. The new 5-yea

NSC will offer an interest rate that is 25 basis points above the 5-year bond yield. Through this

step, the government has breathed new life into an instrument that had almost gone the way o

T-Rex and its Jurassic cousins.

The government has also introduced a 10-year NSC, which will carry a coupon rate of 50 basi

points above the 10-year bond yield. However, tax-saving FDs offered by banks are a better

option. Even if the 5-year benchmark bond yield moves up to 9%, the NSC will offer an interes

rate of 9.25%.

Banks are already offering higher rates of 9-9.5%. Sure, bank deposits cannot match the safe

of a sovereign guarantee that the NSC carries, but if you choose a stable PSU bank or a

reputed private bank, there is no reason to worry.

SENIOR CITIZENS' SAVINGS SCHEME

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This assured return scheme has

also become a market-linked

option from this year. The interes

rate of 100 basis points above the

5-year government bond yield is

attractive.

However, again, tax-saving FDs

appear a better bet because

banks offer senior citizens a 25-5

basis points higher rate of interes

This means the interest rate

offered is almost 75-125 basis

points higher than that offered by

the SCSS.

The only good thing about the 5-year SCSS is that it gives a quarterly payout, which is very

important for retirees. Plus, there is also the assurance of government backing. The only glitch

there is a Rs 15 lakh investment limit per individual.

This year's budget has removed an important lacuna in rules regarding senior citizens. Till last

year, banks and the Senior Citizens' Savings Scheme considered an individual a senior citizen

when he turned 60, but the taxman waited for another five years before extending him the

benefit of a lower tax rate. The age limit for senior citizen taxpayers has now been reduced to

60 years.

EQUITYLINKED SAVING SCHEMES

Tax-free dividends, no tax on income, shortest lock-in period, flexibility of investments and

potential to give high returns.

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All this makes ELSS funds possibly the best way to save tax. However, it may be the worst wa

to avail of your Section 80C limit if you tend to be reckless with investments and if notional

losses give you sleepless nights. ELSS funds carry the same risk as an equity fund, so the SIP

route is the best way to go about it.

You may not have too much elbow room i

you haven't already made some taxsaving

investments for this financial year. Splittin

Rs 70,000-80,000 into three monthly

instalments before 31 March will not really

serve the purpose.

However, if you plan to invest about Rs

15,000-30,000 in ELSS this year, split thesum into three monthly instalments of Rs

5,000-10,000 each.

Go for the dividend option if you want to

book profits periodically. There are apprehensions that the ELSS option will end after the DTC

comes into force. However, the industry expects that its representations to the Finance Ministr

will be heard and the tax benefits restored.

ELSS is seen as a good way of initiating an investointo equity funds. "When the first-time investor will

get good returns, he will start putting more into

mutual funds and get into the investing habit," says

Vikaas Sachdeva, CEO of Edelweiss Mutual Fund.

UNIT-LINKED INSURANCE PLANS

Most invest in Ulips don't know what they are buyin

Otherwise, why would they want to surrender a Ulip

after the mandatory 3-5-year lock-in period? Just

when the pain of the initial years is over and the

gains have started, they exit the policy or stop

paying the premium.

Buy a Ulip only if you can continue the plan for at

least 12-15 years. Before that, the plan may not be

able to recover the charges levied in the first few

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years.

Used well, a Ulip can be an effective asset allocation tool. For this, the investor should be

aware of the switching facility as well as understand the various funds in which the Ulips can

invest.

You can invest your Ulip corpus in equities as well as debt funds. Currently, long-term debt

funds are attractive because of the possibility of a rate cut.

Look at the fact sheet of your Ulip to see which fund holds long-term government bonds and

invest this year's premium in it. Use the debt fund even if you want to invest in equities.

Put this year's entire premium in the debt fund and then systematically transfer small amounts

to the equity fund in monthly instalments of Rs 5,000-10,000. This way, you will be cushioned

from the volatility in stock markets and gain from the rise in the bond market.

Make sure your insurance plan is DTC-compliant. The DTC says that to claim tax deduction

and tax exemption on maturity, an insurance plan must offer a cover of 20 times the annual

premium. Buy a plan only if it meets this criterion.

LIFE INSURANCE POLICIES

The default option for the lazy investor, traditional life insurance policies are perhaps the worst

way to save tax. After Ulip charges were capped by the Insurance Regulatory and

Development Authority (Irda), insurers have started pushing these debt-based plans.

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The buyer pays a heavy price by getting returns that cannot match inflation and get an

insurance cover that is too small to be of any significance.

"Customers can choose the specific insurance solution depending on their goals, but they

should not compromise on addressing their insurance need," advises Deepak Sood, CEO &

MD, Future Generali Life Insurance. Keep the DTC in mind when you buy a life insurance

policy. While the DTC is yet to be passed, it has not explicitly stated whether the new rules for

tax deduction and taxability of insurance income will be with prospective effect. However, it

seems unlikely that the rule will be with retrospective effect.

If existing policies are also brought under the ambit, 95% of the policies will lose their tax

benefits. Even so, don't buy an insurance policy only to get tax deduction and tax-free income

A PPF account will serve this purpose better. The tax deduction on life insurance brings downthe effective cost of the cover. So, if you are in the highest 30% tax slab and pay Rs 10,000 a

year for your term insurance cover, your effective cost is only Rs 7,000 a year. This should

prompt you to buy a bigger term insurance cover.

PENSION PLANS

This is a useful tool for retirement planning. There are three types of pension plans in the

market. Unitlinked pension plans are sold by insurance companies. They offer greater

transparency, flexibility and control to the investor. Just like a Ulip, you can tweak the asset

allocation in your pension plan depending on your reading of the market and risk appetite.

Buying one is fairly easy.

Then there is the New Pension Scheme, which also invests in a mix of equity, debt and money

market instruments. The investor can choose any of the six fund houses to manage his

investments. However, investing in the NPS is not an easy task because the intermediaries ar

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not interested in selling a scheme that offers them a pittance in commission. There are other

concerns as well.

Some of the NPS funds are routinely violating the investment mandate. The NPS itself has no

been able to put in place the necessary back-end operations as envisaged in the original

architecture of the scheme. You still can't buy from more than one fund house, thus limiting the

choices for the investor. The simplest pension plans are those being sold by mutual fund

houses.

The only thing that differentiates these plans from regular funds is the stiff penalty imposed on

withdrawals before the investor turns 58. Before you invest in a pension plan, remember thaton maturity only 33% can be withdrawn and the rest must compulsorily be used to buy an

annuity.

This annuity will pay the investor a monthly income. Till date it was possible to buy a pension

plan from one company and shift to another for an annuity when the policy matured. Now, Irda

wants that the annuity must also be bought from the same insurer. This is why many

companies have stopped selling pension plans.

INFRASTRUCTURE BONDS

The new Section 80CCF gives you an additional tax deduction of Rs 20,000 invested in long-

term infrastructure bonds. The higher the tax bracket, the more one saves in tax. An investmen

of Rs 20,000 will translate into tax savings of Rs 6,180 for those in the highest 30% tax slab

(taxable income of over Rs 8 lakh a year).

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If you factor in the tax savings as well as the tax on interest income, this is an effective return o

almost 14.5% for an investor who exits after five years. For those in the lower 20% tax bracket

(earning up to Rs 8 lakh a year), the tax savings will be lower at Rs 4,120.

In the lowest tax bracket (annual income of up to Rs 5 lakh), the investment will save Rs 2,060

in tax. One good thing about these bonds is that after the lock-in period, they can be sold in th

secondary debt market. Experts say it is a good idea to invest in the long-term bonds at curren

rates and hold for a few years. Interest rates seem to have peaked out and when they fall, the

value of these 9-9.25% bonds will zoom in the secondary market.

HOUSING OPTION LOAN REPAYMENT

If you are paying a big EMI on your home loan, there may not be much left to invest in tax-

saving options. But don't fret. The principal portion of your home loan EMI gives you tax

benefits under Section 80C. This also brings down the effective cost of the loan. To optimise

the benefits, take a joint loan with your spouse or parent.

Both co-owners of the property can separately claim tax benefits on the home loan. However,

don't let the tax breaks tempt you to extend the tenure of your loan. The shorter the tenure, the

better it is.

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TUITION FEES

Fuming over the rise in your child's school fee? Here's the good part. The tuition fee paid for u

to two children is also eligible for deduction under Section 80C.

This includes the tuition fee paid to any recognised educational institution, playschool and

creche. Foreign colleges and universities and private coaching classes do not qualify for the

deduction. Also, the fee has to be for the taxpayer's own children and not siblings, nephews,

nieces or grandchildren. Also, the benefit cannot be availed of by both the parents.

If there's only one child, only one of the parents can claim the tax benefits on the school tuition

fee. Otherwise, each parent can claim the tax benefit for different children.

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