So, March approaching, and it is time to plan savings for income tax purposes. You need to invest for tax savings purposes in investments that qualify for deductions under Sec 80 C.

 As against earlier years, not many avenues are left to plan income tax on salary by “classifying” the salary under different heads. However some types of allowances as HRA; conveyance; Medical reimbursement still come handy to save income tax, which an employee must use to minimize his tax liability.

Apart from planning of income tax from different heads of salary, you can avail deduction of up to Rs 1 lac for savings made in permissible instruments eligible for deduction u/s 80C.

Most common instruments that are used to plan income tax liability as PF, PPF, LIC, House loan repayment and NSCs. Out of these, LIC is loosing its sheen and NSC/PPF are not attractive any more as the returns are barely able to fight the rate of inflation. However, small mercies, interest on PPF is tax free. Every second year, around the budget times, move comes up to tax PPF interest on withdrawal, it seems sooner or later, it could come under tax bracket.

This year because of sudden increase in indices, not witnessed so far in country’s corporate history, mutual funds too have reported good returns. A shorter lock-in period of three years in mutual funds, in addition to the tax benefit make ELSS funds appealing options for those with a higher risk appetite.

If you have some risk appetite, you can make a small allocation to tax-saving funds within the overall Rs 1,00,000 limit. It may be noted that though this year too it is expected sensex to report next high levels, initial investors should make only limited investments in this instrument. These investments can be made after putting in some initial deposits in PPF, bank fixed deposits and other small-savings instruments.

These funds, largely invest utp 40 per cent of their corpus in stocks with a market capitalization of less than Rs 10,000 crore. These funds, largely, operate in mid-cap space. However their small capital base makes them more risky than a typical diversified fund.

Some funds that have consistently delivered good returns for the past three years are Fidelity Tax Advantage, HDFC Tax Saver and Reliance Tax Saver schemes. It may be noted that over a period of more than 5 years, barely few funds have posted impressive returns, that is returns exceeding that available in PPF. To be fair to these funds, the return of investor to stock market is also relatively new phenomenon.

If you consider the fluctuations in stock market too frightening, you can also consider taking the SIP route to investing in these funds.