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Personal Finance - Save tax, maximise returns

27 Nov 2015

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tPara>For salaried employees, investments for tax planning must have prudent asset allocation of debt and equity. This will ensure that such investments made every year not only save on tax outgo but also build a corpus in the long-run, which is inflation protected.

At present, one of the most important components of tax savings is Section 80 C of the Income Tax Act, 1961. An individual can invest up to R1.5 lakh in a fiscal year in financial instruments like Public Provident Fund (PPF), life insurance premiums, five-year bank or post office fixed deposits, five or 10-year National Savings Certificates of India Post, employee’s contribution to provident fund, Equity-Linked Savings Scheme (ELSS) of mutual funds and unit-linked insurance plans (Ulips) of life insurance companies. Moreover, a tax-payer can avail an additional exemption under Section 80CCD of R50,000 by investing in government’s National Pension Scheme which is a mix of equity and debt instruments.

Employees’ Provident Fund (EPF):

Those working in the organised sector is covered by the Employees’ Provident Fund Organisation (EPFO), which invests mostly in debt instruments. From August this year, EPFO has been investing 5% of its incremental corpus in Nifty and Sensex-based exchange traded fund. An ETF is a basket of securities that tracks the stock prices of the companies on an underlying index, and is traded on the exchanges. It comes with a much lower expense ratio. The EPF is country’s largest defined contribution and publicly managed plan and the employee’s contribution gets tax exemption. Employees in the organised sector are required to participate in provident funds and pension plans administered by EPFO and it covers 14% of the workforce.

National Pension Scheme (NPS):

The biggest benefit for tax payers in this year’s Budget came in the form of investment in NPS. One can avail tax benefit on investment of up to R50,000 in a year under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C. For non-government employees, up to 50% of the contribution can be invested in equities and the rest between corporate and government debt paper. It has given a return of around 11% and is an ideal tax-saving investment with equity and debt exposure. After retirement, a subscriber can withdraw 60% of the corpus and buy annuity from the rest 40% of the accumulated corpus. Subscribers of NPS Tier 1 account can now make partial withdrawal of up to 25% of contributions for certain specified circumstances after 10 years of being in the scheme.

Equity Linked Savings Scheme (ELSS):

It offers the twin-advantage of capital appreciation through investment in stock markets and tax benefit. The lock-in period of the investment is three years and there is minimum turnover in portfolio. One can invest a minimum of R500 a month in ELSS through a systematic investment plan of mutual fund and can stagger the investments, which would, in turn, bring down the risk sizeably. Money is debited automatically from the investor’s bank account through the ECS mandate and units are allocated based on net asset value applicable for the day. ELSS schemes are open-ended, that is, investors can subscribe to the fund any day.

Unit Linked Insurance Plans (Ulips):

They are essentially market-linked insurance scheme that offer tax saving options under section 80C of the Income Tax Act. Ulips offer the advantage of life cover with an investment in equity and debt markets. The lock-in period is for five years. One can also opt for a debt market-linked Ulips and move to equity when the market is moving up to attain higher returns.

National Savings Certificates:

These certificates are available at post offices and one can opt for a 5-year or 10-year tenor. The amount is invested in debt and deposits made by individuals qualify for tax rebate under Section 80C of I-T Act. The interest accrue annually and is deemed to be reinvested under Section 80C of I-T Act. The 5-year certificates give 8.5% interest compounded six monthly but payable at maturity. So, R100 invested grows to R151.62 after 5 years. Similarly, the 10-year certificates give return of 8.80% compounded six monthly but payable at maturity. Here R100 invested become 236.60 after 10 years. The certificates are available in denominations of R100, R500, R1,000, R5,000 and R10,000. The minimum investment is R100 and there is no maximum limit. However, one can get tax exemption by investing up to R1.5 lakh a year.

Five-year term deposits:

For risk-free investors, five-year bank or post office deposits can also get them tax benefits under section 80C of I-T Act. The tax benefit can be availed in invested for the fixed tenure without premature withdrawal and one can invest up to R1.5 lakh. Bank will issue a fixed deposit receipt for claiming tax benefit and the deposit under this scheme cannot be pledged to secure a loan. An investor will have to pay tax on the interest earned on these term deposits on the basis of annual accrual or receipt, depending upon the method of accounting followed by the assessee.

Various avenues

From August this year, EPFO has been investing 5% of its incremental corpus in Nifty and Sensex-based exchange traded fund. Employees in the organised sector are required to participate in provident funds and pension plans administered by EPFO and it covers 14% of the workforce.

The biggest benefit for tax payers in this year’s Budget came in the form of investment in NPS. One can avail tax benefit on investment of up to R50,000 in a year under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C.

ELSS offers the twin-advantage of capital appreciation through investment in stock markets and tax benefit. The lock-in period of the investment is three years and there is minimum turnover in portfolio.

Ulips are essentially market-linked insurance scheme that offer tax saving options under section 80C of the I-T Act.

 

Source: The Financial Express BACK

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