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THE CHALLENGE IS TO GENERATE POST-TAX, INFLATION-ADJUSTED RETURNS
In effect, because of the rising prices, that is inflation, most people are in a situation where their ability to save for the future have been compromised, since they are forced to spend more on consumption and hence their savings have come down.
For example, an 8% annual rate of inflation would mean that an article that cost Rs 100 a year ago, now costs Rs 108. Now if someone put Rs 10,000 in a bank fixed deposit (FD) about a year ago, at 8% rate of interest, he will have Rs 10,800 now. Given a 8% rate of inflation, the basket of products and services for daily life that cost Rs 10,000 a year ago, will now cost Rs 10,800. So even if someone kept money in a bank that earned 8%, at the end of the year, because of inflation, he is still at the same level in terms of purchasing capacity.
Now if the FD rate is 8% but the rate of inflation is 10%, he will actually be worse off. While he earned Rs 800 in his bank FD, but for the same basket of consumables he would need to spend Rs 1,000 more. The extra Rs 200 that he`ll spend, will reduce his savings by that much. He would be worse off if he has to pay income tax on his FD interest income.
At present, often it is seen that retired people keep their retirement corpus in bank FDs, mainly because of the security of the principal amount and also returns they offer. However, since the FD rates are very closely linked to the rate of inflation, for most retired people while they get a steady income, often inflation becomes a burden. To meet the rising income, they at times also dip into their retirement corpus.Worse, at times they fall into a vicious cycle of dipping more and more into their retirement corpus to meet their rising ex pense.
Now for people who are currently working, it is important to prepare for their retired life so that they do not get into such a situation. That needs some planning so that retirement corpus is built which can beat inflation. For that one should aim to have post-tax returns that would be above the rate of inflation. One of the ways of achieving that is to invest in such instruments which, over the long term, can give higher returns and also minimize the tax burden.
According to financial advisors and planners equities, equity mutual funds and some other investment instruments like the recent ly-introduced tax-free bonds offer tax free returns if they are held for more than one year. Investments in debt mutual funds, held for over three years, also offer superior and nearly tax-free returns. However, the aim should be to invest in these instruments for years and then change the portfolio mix in a way that would offer superior tax-free return during the post-retire ment years, they say.
Investors who have lower risk appetite could use the indexation benefits in fixed income mutual funds, which make them extremely tax efficient to beat bank FDs by a considerable margin.Normally a bank FD post taxation would provide negative real returns (returns below inflation).
Investors with slightly higher risk profile and those with longer horizon would find equity and hybrid mutual funds generating wealth and achieving long term life goals like retirement, children's education etc most efficiently.
One should also remember that all dividends and the redemption amount that one gets from his long term investments in mutual funds also are tax free. The same is the case for dividends one earns from his direct investments in equities. Mutual funds also have the added advantage of diversification which also helps reduce risks over the longer term, financial planners and advisors say.
They also say that of all the various mutual fund schemes which are available, equity linked savings schemes (ELSS) allow one tax rebate, have the shortest lock-in among all tax saving schemes and returns which are generated from ELSS are also tax free.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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