The most important rule of tax planning is that it is no different from
financial planning. The Section 80C offers a wide range of options, each
suited to a different need. Choose an option that fits into your
overall financial plan, not because it offers good returns or your
brother-in-law is selling it.
It is easier to identify the best option if you do not leave tax planning for the dying days of the financial year. You get a rough idea of how much you need to save at the beginning of the fiscal year.
Allocate your Rs 1 lakh limit across different Sec 80C options as dictated by your financial goals, following the same principles of asset allocation that apply to other investments.
Taxpayers can take a leaf out of Ramakant Mishra's book. The Belapur-based PSU bank employee wants to save for the education and marriage of his two daughters.
Given that these goals are a good 15-20 years away, he has been advised to invest in diversified equity funds. So, he has started a monthly SIP of Rs 3,000 in an ELSS fund, thus aligning his tax-saving investment with a long-term financial goal. "I chose to put money in the ELSS fund because it serves a twin objective in my financial plan," says Mishra.
ARE YOU READY FOR RISK?
That's good thinking on Mishra's part, but allow us to slip in a caveat here. ELSS funds invest in stocks and carry the same risk as any other equity fund. In fact, the risk is greater because you can't touch the investment before the three-year lock-in period.
Besides, it is best to invest in equity mutual funds in monthly driblets. Investing a large amount at one go may have been a good strategy when the Nifty was floundering at 2,700 levels and a PE of 11-12 in early 2009. But it would be hara-kiri to do so when the index has crossed the 6,000 mark and is trading a tad above its long-term average PE of 18.
Also Read: Six tax goof-ups to avoid
For small investors, this is the time to be fearful rather than greedy. They should not attempt to get on to the ELSS bus now—at least not in a lump-sum mode.
It is easier to identify the best option if you do not leave tax planning for the dying days of the financial year. You get a rough idea of how much you need to save at the beginning of the fiscal year.
Allocate your Rs 1 lakh limit across different Sec 80C options as dictated by your financial goals, following the same principles of asset allocation that apply to other investments.
Taxpayers can take a leaf out of Ramakant Mishra's book. The Belapur-based PSU bank employee wants to save for the education and marriage of his two daughters.
Given that these goals are a good 15-20 years away, he has been advised to invest in diversified equity funds. So, he has started a monthly SIP of Rs 3,000 in an ELSS fund, thus aligning his tax-saving investment with a long-term financial goal. "I chose to put money in the ELSS fund because it serves a twin objective in my financial plan," says Mishra.
ARE YOU READY FOR RISK?
That's good thinking on Mishra's part, but allow us to slip in a caveat here. ELSS funds invest in stocks and carry the same risk as any other equity fund. In fact, the risk is greater because you can't touch the investment before the three-year lock-in period.
Besides, it is best to invest in equity mutual funds in monthly driblets. Investing a large amount at one go may have been a good strategy when the Nifty was floundering at 2,700 levels and a PE of 11-12 in early 2009. But it would be hara-kiri to do so when the index has crossed the 6,000 mark and is trading a tad above its long-term average PE of 18.
Also Read: Six tax goof-ups to avoid
For small investors, this is the time to be fearful rather than greedy. They should not attempt to get on to the ELSS bus now—at least not in a lump-sum mode.
In the same context, the newly launched Rajiv Gandhi
Equity Saving Scheme is best left untouched. It gives additional tax
deduction to first-time investors who want to enter the equity market.
Instead of taking this route, which will give them only 50 per cent deduction, the ELSS funds are a better option. We have identified six of the best ELSS funds for you. These may not be the best performing funds, but have a stable track record. If your risk profile allows you to invest in these funds, stagger your investments across 2-3 SIPs between now and 31 March.
Instead of taking this route, which will give them only 50 per cent deduction, the ELSS funds are a better option. We have identified six of the best ELSS funds for you. These may not be the best performing funds, but have a stable track record. If your risk profile allows you to invest in these funds, stagger your investments across 2-3 SIPs between now and 31 March.
HOW NOT TO INVEST IN ULIPs
The same logic applies to investments in Ulips. Putting a lump sum in equity through a Ulip is risky. This is especially true in case of single premium plans, where you put a huge amount in the market at one go. The good thing is that unlike the ELSS funds, Ulips allow you an alternative asset allocation model.
If you are paying a large premium, put your money in the debt option instead of the equity fund in the Ulip. You can then gradually shift small amounts to the equity option. Most insurance firms allow 10-12 switches free of charge in a year.
The new Ulip, introduced after Irda's 2010 guidelines, is more customer-friendly and transparent. Unfortunately, however, the capping of the charges has led agents to avoid these low-commission plans. In 2011-12, barely 15 per cent of the total premium from new policies came from Ulips, down from almost 75 per cent in 2007-8.
Admittedly, these market-linked insurance plans are not the best investment option in the market today. Other investments can yield the same results at a lower cost. ELSS funds are a simpler and cheaper option for wealth creation. You can save tax through 5-year bank FDs or PPF as well, and a term plan gives you a bigger insurance cover at a lower price.
Also Read: Choose an insurance policy like you would a life partner
What Ulip bashers overlook is the convenience of bundling everything into a single product. You get equity exposure, tax deduction, tax-free income and can switch your allocation as per your reading of the market. Even so, a Ulip should not be your first insurance policy. This investment-cum-insurance plan should be bought only if you have purchased enough insurance (roughly 5-6 times your annual income) with a pure protection term plan.
Similarly, avoid putting large sums into your NPS account, especially if you have an aggressive portfolio. Even though the NPS follows a prudent asset allocation, it's best not to get caught on the wrong foot.
YOUR SECTION 80C CHECKLIST
The same logic applies to investments in Ulips. Putting a lump sum in equity through a Ulip is risky. This is especially true in case of single premium plans, where you put a huge amount in the market at one go. The good thing is that unlike the ELSS funds, Ulips allow you an alternative asset allocation model.
If you are paying a large premium, put your money in the debt option instead of the equity fund in the Ulip. You can then gradually shift small amounts to the equity option. Most insurance firms allow 10-12 switches free of charge in a year.
The new Ulip, introduced after Irda's 2010 guidelines, is more customer-friendly and transparent. Unfortunately, however, the capping of the charges has led agents to avoid these low-commission plans. In 2011-12, barely 15 per cent of the total premium from new policies came from Ulips, down from almost 75 per cent in 2007-8.
Admittedly, these market-linked insurance plans are not the best investment option in the market today. Other investments can yield the same results at a lower cost. ELSS funds are a simpler and cheaper option for wealth creation. You can save tax through 5-year bank FDs or PPF as well, and a term plan gives you a bigger insurance cover at a lower price.
Also Read: Choose an insurance policy like you would a life partner
What Ulip bashers overlook is the convenience of bundling everything into a single product. You get equity exposure, tax deduction, tax-free income and can switch your allocation as per your reading of the market. Even so, a Ulip should not be your first insurance policy. This investment-cum-insurance plan should be bought only if you have purchased enough insurance (roughly 5-6 times your annual income) with a pure protection term plan.
Similarly, avoid putting large sums into your NPS account, especially if you have an aggressive portfolio. Even though the NPS follows a prudent asset allocation, it's best not to get caught on the wrong foot.
YOUR SECTION 80C CHECKLIST
(Find out which of these tax-saving investment options suit you best by considering the following four basic parameters.)
NEW TAX RULES FOR INSURANCE
The January-March quarter has traditionally been the busiest for the life insurance sector. Almost 70 per cent of the total business is transacted during these three months because the taxman is the most effective insurance salesman. If you plan to buy an insurance policy to save tax this year, keep in mind the changes in the tax rules relating to life insurance.
An insurance plan will be eligible for tax deduction and the income will be tax-free only if it covers the policyholder for 10 times the annual premium. Till last year, policies were required to offer a cover of five times the annual premium for tax breaks. The clause introduced in Budget 2012 will further bring down the returns from traditional policies.
NEW TAX RULES FOR INSURANCE
The January-March quarter has traditionally been the busiest for the life insurance sector. Almost 70 per cent of the total business is transacted during these three months because the taxman is the most effective insurance salesman. If you plan to buy an insurance policy to save tax this year, keep in mind the changes in the tax rules relating to life insurance.
An insurance plan will be eligible for tax deduction and the income will be tax-free only if it covers the policyholder for 10 times the annual premium. Till last year, policies were required to offer a cover of five times the annual premium for tax breaks. The clause introduced in Budget 2012 will further bring down the returns from traditional policies.
As it is, these policies gave very low returns of around 5-6 per cent.
Now, this is likely to fall to roughly 4-5 per cent. This is because a
larger life cover would require a bigger sum going into mortality
charges every year. Also, the service tax rate has been enhanced.
It is this measly return that made Mumbai-based Arjun Pawar surrender
his three traditional policies this year. With a home loan EMI to
service, he was finding it tough to pay a premium of Rs 85,000 every
year. "They were not giving me adequate protection and were gobbling up
too much in premium," he says.
He has now taken an online term insurance plan, which costs him Rs 11,000 a year and covers him for Rs 1 crore. Pawar is not worried about the tax-saving investments because the stamp fee and registration charges he paid for his house will more than take care of his Section 80C limit this year.
He has now taken an online term insurance plan, which costs him Rs 11,000 a year and covers him for Rs 1 crore. Pawar is not worried about the tax-saving investments because the stamp fee and registration charges he paid for his house will more than take care of his Section 80C limit this year.
SMALL SAVINGS MORE ATTRACTIVE
While the Finance Ministry wants you to stop looking at life insurance purely as a tax-saving instrument, bank representatives and agents continue to push these high-cost, but low-yield, products down the throats of taxpayers.
Hyderabad-based software engineer Phani Kumar wants to invest in the Public Provident Fund (PPF), but officials at the nationalised bank branch he approached set a peculiar precondition—buy a life insurance plan if you want to open a PPF account in the bank. "When I told them I don't have enough surplus to buy an insurance policy, they refused to open the PPF account for me," he says.
While the Finance Ministry wants you to stop looking at life insurance purely as a tax-saving instrument, bank representatives and agents continue to push these high-cost, but low-yield, products down the throats of taxpayers.
Hyderabad-based software engineer Phani Kumar wants to invest in the Public Provident Fund (PPF), but officials at the nationalised bank branch he approached set a peculiar precondition—buy a life insurance plan if you want to open a PPF account in the bank. "When I told them I don't have enough surplus to buy an insurance policy, they refused to open the PPF account for me," he says.
Taxpayers
like Phani Kumar are struggling because the government has abolished the
commission payable to agents for opening new PPF accounts. Ironically, this coincides with the PPF and other small savings schemes
becoming attractive after the government made their returns
market-linked in November 2011. The interest rates offered by small
savings schemes are now pegged to the benchmark yield of government
bonds.
Also Read: RGESS is an option best left untouched
However, the attractiveness of these options is likely to come down. Bond yields have come down in the past one month and are likely to recede even further on expectations of a rate cut. This could translate into lower rates for small savings schemes, such as the PPF, NSC and the Senior Citizens' Saving Scheme (SCSS).
The consensus estimate by Bloomberg is that the 10-year bond yield will fall to around 7.95 per cent by March, and slip to 7.77 per cent by December 2013, before recovering to about 8.01 per cent in March 2014.
LOWER RATES FROM SMALL SAVINGS IN THE FUTURE
Also Read: RGESS is an option best left untouched
However, the attractiveness of these options is likely to come down. Bond yields have come down in the past one month and are likely to recede even further on expectations of a rate cut. This could translate into lower rates for small savings schemes, such as the PPF, NSC and the Senior Citizens' Saving Scheme (SCSS).
The consensus estimate by Bloomberg is that the 10-year bond yield will fall to around 7.95 per cent by March, and slip to 7.77 per cent by December 2013, before recovering to about 8.01 per cent in March 2014.
LOWER RATES FROM SMALL SAVINGS IN THE FUTURE
( With the bond yields expected to come down in the coming months, the interest rates offered on small savings will also fall.)
"If the RBI cuts rates by 50 basis points at one go, the benchmark yield could fall to 7.75 per cent," says Avnish Jain, senior fund manager for fixed income, ICICI Prudential Mutual Fund.
THE BEST ELSS FUNDS
"If the RBI cuts rates by 50 basis points at one go, the benchmark yield could fall to 7.75 per cent," says Avnish Jain, senior fund manager for fixed income, ICICI Prudential Mutual Fund.
THE BEST ELSS FUNDS
(If your risk profile allows you to invest in these funds, stagger your investments across 2-3 SIPs between now and 31 March.)
The interest rate of small savings schemes is calculated on the basis of
the average yield during the year and is announced every year by the
government. For instance, your PPF balance earns 25 basis points above
the 10-year benchmark yield.
BEST TAX-SAVING FDs
BEST TAX-SAVING FDs
(They offer higher rates than the PPF, but the income is fully taxable, which pares the effective yield for the investor.)
The rate was raised from 8 per cent to 8.6 per cent in 2011-12 and further hiked to 8.8 per cent for 2012-13.
The rate was raised from 8 per cent to 8.6 per cent in 2011-12 and further hiked to 8.8 per cent for 2012-13.
However, with bond yields coming down and the annual average dropping to
8.25 per cent, the PPF interest rate could be lower at 8.5 per cent in
2013-14. It could fall further in the following years.
Though the PPF rate will change every year, the SCSS and NSCs will have a uniform rate till maturity. So, if you plan to invest in the SCSS or NSCs, do so this year to lock in at the high rate offered right now.
The SCSS is especially the best option for senior citizens because it combines tax savings with regular income. It is a perfect fit for Delhi-based retired government officer Satyaprakash Goyal.
"Till I was working, my provident fund contribution and insurance premiums used to take care of my tax planning. So I needed an option that gives regular income as well as tax savings," he says.
Now Goyal has put the maximum limit of Rs 15 lakh in the SCSS. Although he will get a tax benefit only on Rs 1 lakh, he gains from locking in at a high rate of 9.3 per cent.
There is a possibility of the interest rate coming down in April 2013.
Though the PPF rate will change every year, the SCSS and NSCs will have a uniform rate till maturity. So, if you plan to invest in the SCSS or NSCs, do so this year to lock in at the high rate offered right now.
The SCSS is especially the best option for senior citizens because it combines tax savings with regular income. It is a perfect fit for Delhi-based retired government officer Satyaprakash Goyal.
"Till I was working, my provident fund contribution and insurance premiums used to take care of my tax planning. So I needed an option that gives regular income as well as tax savings," he says.
Now Goyal has put the maximum limit of Rs 15 lakh in the SCSS. Although he will get a tax benefit only on Rs 1 lakh, he gains from locking in at a high rate of 9.3 per cent.
There is a possibility of the interest rate coming down in April 2013.
Source : The Economic Times, 7 Jan, 2013
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