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The general notion is that it feels great to be famous – to be someone! But sometimes it is great too if you are nobody like me who works as Asst. Teacher in a semi-govt. school in a semi-urban locality in one of the remotest and non-descript part of the country. Why do I feel great? Because I don’t have to go through the arduous task of filling tax returns every year like my colleagues do! Yes you read it right! I don’t have to pay income taxes (I belong a special community in a special area where nobody from my community has to pay) although my income from regular job and online is roughly around Rs. 500,000 per annum. I don’t even have a (PAN) card! But from what I see my colleagues go through, I reckon it is not funny to file returns especially as every year there are some changes made in tax policies by the government. So, I find my mates go around finding the best and cheapest tax accountant available in the town. Professional consultation is not always for just filling of returns, but salaried individuals with limited income also need to exploit the different schemes on offer by the government to save some paisa for the future and thereby get tax rebates.

As I have avid interest in economic and business affairs, I do read lots of finance and business related papers and journals. The other day I found one of the magazines (Outlook Money) that I subscribe to enclose a little pocket book titled “The Complete Tax Guide for 2008-09” which is really a handy item for all normal tax-payers. It gives a complete guide from calculating incomes to deductions, computation and tax planning, clubbing of income to filing of returns. I believe most net junkies don’t have time to read books anymore. While business houses can afford to hire chartered accountant firms for audit services, individuals can save lots of money if they have basic ideas about tax laws and tax saving schemes. Here, I’ll write what is advised on that handy book about “tax saving strategies during your lifetime.”

The budget of 2008 had much to offer to the salaried tax payers of the country. The smooth passing of the Finance Bill with no changes to the proposals made can bring in showers this financial year. There are two ways in which tax payers will benefit. One, the threshold level of income tax has gone up. This means that a greater part of the income come under zero tax status.

Two, the tax slabs have also been raised. Currently the maximum marginal rate of tax of 30 percent is applicable from the income level of Rs. 250,000, this now stands doubled at Rs. 500,000 for the next financial year. This means an under 65 year old male tax payer with a gross income of Rs. 500,000 will now save about Rs. 44,000 in income tax. What happens when you earn lot more than that? The simple answer is Section 80. But what options are good in Section 80? Here we go.

An individual’s requirements and goals keep changing according to what stage of life he is in. when you start working, the savings for tax-saving investment might well be your savings as expenses are in hot pursuit of your income. Like the rest of your working life, during this period also, your provident fund savings will, by default, take up some portion of the total Section 80C deduction.

So it is important to start your tax saving investments with a public provident fund (PPF) account. Given its safety, it is government backed, with relatively high returns (currently 8 percent per annum), and tax exemptions on its interest earnings and the final corpus, its effective post-tax return currently works out at above 11 percent per annum. Also given its Rs. 500 per year minimum investment stipulation, with one contribution allowed every month, you can even invest small amounts for your long-term goals.

During this stage of your life, since you are likely to be without major responsibilities or liabilities, you are in a position to take investment risks such as those involved in equity mutual funds. This is why many financial experts and recommend that you invest in equity linked saving schemes (ELSS) of mutual funds. With ELSS, you can channelise even small amounts of investments, amounts as less as Rs. 1000 every month, in equity mutual funds through systematic investment plans (SIPs).

For those who are less financially literate, struggle to save regularly and would prefer to rely on investment products of insurance companies, the option of investing in highest exposure variant of unit linked insurance plans (Ulips) exist. You can also opt for a pension plan to augment your PF investments.

By the time you are married, your income would have gone up further and your PF deduction would have gone up too. This will leave you with lesser elbow room with Section 80C investments. After mandatory PF deductions, the first charge on Section 80C investments from now on would be of life insurance premium payments. You need adequate life cover, whether you get tax breaks or not. One way of having your cake and eating it too would be to take low-premium, high cover term-insurance plans. These will still leave you with adequate portion of Section 80C entitlements.

After term insurance, you can continue with PPF and ELSS investments. If possible, increase the amounts in these to exhaust the Section 80C limit. In case of a double-income household, ensure most of the tax saving investments is done by the person who is in the higher tax slab. If both the incomes are in the highest tax slab, risk taking capability is higher. This means that such a couple needs to invest more in ELSS, besides both investing in PPF.

By the time you have kids, the PF deduction would have gone up further with the rise in income. Once you have reached an annual income of Rs. 500,000-600,000, there isn’t much you can do in terms of tax saving investments. While the life cover through term plans needs to go up, in case of double income family, lives of both the spouses should be covered since both have dependent kids.

While you need to continue with your PPF and ELSS contributions, you could also claim Section 80C benefits for contributions to kids’ PPF accounts (each parent can claim up to a combined limit of Rs. 70,000 of tax deduction for contributions to their individual and kids’ accounts). None can have more than one account in their own name. Contributions to kid’s PPF account can be a big help if you still have some distance to go before the Rs. 100,000 limit. But the chances are that by the time you have kids, you have a host of items that qualify for Section 80C and these add up to more than Rs. 100,000.

At this stage, two major items that typically qualify for deductions would be principal repayment of home loans and tuition expenses of kids. Whether you claim these expenses or not, you will need to continue and, ideally, increase your previous investments in term plans, PPF and ELSS. If ELSS investments don’t qualify for Section 80C benefits due to exhaustion of the limit, you could concentrate more on top performing open ended diversified equity funds.

As you near retirement, you would like to invest in options with lock-ins. It is better to keep investing in existing investments such as PPF and claim tax benefits for expenses such as kids’ tuition expenses and principal repayment of home loans.

There is one more option. You could increase the contribution to your PF since you will be getting the money shortly and give further impetus to the compounding effect.

When you are retired, your Section 80C obligations might not be much. Here, you can opt for Senior Citizens’ Savings Scheme (SCSS), which have been recently made eligible for tax deduction and provides regular income through a return of 9 percent on the invested amount (upper limit Rs. 1.5 million). The key during this period of life is to ensure your investments in income producing investments are not more than your expenses since they won’t help you combat inflation.

In the course of time, rising incomes, lowering tax rates and plugging tax exemptions has meant limited latitude to individuals to save on taxes. But as is shown, there is still enough room and enough ways by which tax saving investments could become a part of your larger financial game plan and make a difference to your future.

Unfortunately, most common people don’t understand the intricacies of taxes and have no idea of what and how they are calculated. The language of taxation is too formal and most of the times is understood by experts only. Although Indian taxation system has undergone tremendous reform and the tax structure is now better organized, it still has long way to go to become really simple. As I understand from my source, common people in developed economies don’t have to worry so much about filing returns as the tax filing is taken care of by professional audit firms (such as Saffery Champness in UK) hired by their employers.

Part of the content sourced from Outlook Money