The financial year 2007-08 is about to end, and if you have not made investments for planning your income tax, time is running out.

I have come across few people, who feel, should they invest in tax savings scheme or rather pay income tax?

To my mind, answer is clear. In Indian context, we do need some savings as we have to take care of old age problems and other contingencies. So some savings are must, and Income Tax savings provide a sort of compulsory way to save and one must save to the extent of savings allowed.

But there is another aspect to it. If you can earn more than about 16% -18% from alternate sources, you need to invest in tax saving schemes and may go ahead with your own avenues of savings. Logic is simple. Most income tax savings plan allow you returns of about 8 percent and usual lock in period is 3 years. Most likely you would be in 20% or 30% income tax slab and if you don’t invest in such plans, you are left with about 80% to 70% of the savings to invest elsewhere depending upon whether you are in 20% or 30% bracket.

Thus with about 16% or 18% returns elsewhere, you break even and get same compounded maturity amount as income tax savings scheme would give you. If you have some investment in real estate, mutual fund or share that guarantees you this return, go ahead. However, on a personal note, I would always suggest a balanced portfolio and not too aggressive one. Hence some investments in tax saving instruments are desirable.

To plan income tax, you need to invest in instruments that are eligible for deduction under chapter VI of income tax act. Incomes that fall in list of exempted incomes as provided in Section 10 of the Act, such as LTC, House rent allowance to the extent specified, Interest on PF etc do not form part of the income at all.

Deductions under Chapter VI

Under Section 80C, an employee is entitled to deductions for the amount paid in the current financial year for these schemes, subject to a limit of Rs 1 lakh. Investments that are eligible for deduction under this section are Payment of life insurance premium for self, spouse or child, Payment towards a deferred annuity scheme, contribution towards any Provident Fund or to an approved superannuation fund, Subscription National Saving Certificate (8th issue), unit-linked insurance plan, specified mutual funds, Amount paid by an Assessee for purchase or construction of a house, the income from which is chargeable to tax under the head 'Income from house property', Tuition fees, paid to any university, college, school or other educational institution, for the purpose of full-time education of any two children of the employee or Investments in term deposits of not less than five years with a scheduled bank.

Besides, deduction under section 80C, one can claim deduction under sections Section 80CCC&D

Under Section 80CCC, payments to any annuity plan for pension is allowed for deduction. This amount, together with any amounts invested under section 80C should not exceed 1 lac

In addition one can claim tax benefits on mediclaim insurance premium paid. The deduction is available under Section 80D of the Act. The premium can be paid for self, spouse and dependent children.