Skip to main content

Little diligence can make investments tax efficient

 

THERE is an often-heard line from our investors: `Please suggest me an investment that gives high return and is low on risk'. Now, that is something as elusive as experiencing snowfall in peak summer.

The other aspect investors should be focusing on but often tend to neglect is how to make an investment tax efficient.

Everyone wants to save on tax, under Sec 80C, but still fail to find out the best investment vehicles for them. They talk of NSC, five year-plus bank FDs, PPF, equity-linked savings schemes and insurance plans in the same breath, even though each one is different in many ways.

Though NSC, PPF and bank FDs are all 100 per cent debt instruments, their tenures and returns vary. An NSC has a six-year tenure, FDs can have five years or more, PPF has a 15-year tenure. NSC gives 8 per cent returns , which is fully taxable. The post-tax returns would be just 5.53 per cent in the highest tax slab. Returns on bank FDs are more or less the same as post-tax returns.


PPF gives a much higher post-tax return at 8 per cent.

ELSS is completely tax-free after the lock-in period of three years. The returns are variable of course, but long-term returns in equity-oriented assets are expected to be in double digits.


Insurance is a different ball game. Here, returns are tax-free at maturity, but they depend on whether it is equity or debt-oriented scheme.

As part of financial planning, apart from tax savings in the year of investment (under Sec 80C), one needs to look at tax efficiency and post-tax returns over time.


Also, look at the fit of the product in a portfolio. For that, we look at post-tax returns, the asset class to which it belongs, the risk inherent in the investment, its tenure and liquidity before investing.

One product that has emerged as a good investment option in terms of good post-tax returns is a fixed maturity plan or FMP. One-year commercial paper and certificate of deposits, into which most FMPs of that duration invest, are giving about 9.2-9.3 per cent returns now. FMPs are eligible for indexation after a year at 20 per cent. Accordingly, most FMPs are marginally over one year duration. The post-tax yield, assuming an inflation factor of 7 per cent, is thus about 8.8%. This is an excellent return, not available on most other options in a pure debt category.

One should consider tax efficiency while making provisions for liquidity too.
Liquidity margin that one needs to maintain is typically three months' expenses.
This includes all loan repayments too.

While providing for liquidity, it is a good idea to give a thought as to how much of it will be in a bank account and how much elsewhere. In a savings account, the money will earn just 3.5 per cent return.

However, if it were committed to a money manager fund, it could earn 4.5-6 per cent. Money manager funds attract a dividend distribution tax at 14.16 per cent. The interest earned on a savings account is lower and will be subjected to the tax applicable as per one's tax slab.

Hence, investing in a money manager fund is better in terms of returns and also tax treatment. If one is more comfort able with keeping money in the bank, it should be kept in sweep in deposits, which earn more than a savings bank account.

Investing in physical gold has lots of negatives, such as ensuring purity, handling physical gold, storage risks and getting the right price when you sell. Also, physical gold comes under long-term capital gains regime only after three years. And it is subject to wealth tax. A gold ETF is very much like investing in gold but it does not require holding gold in the physical form. As it is in the form of a mutual fund unit, it is eligible for long term capital gains treatment after one year and there is no wealth tax on it.

In home loans, taking a joint loan allows a couple to individually claim up to Rs1,50,000 each of interest paid for deduction from salary income.

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now