Save While The Going’s Good
The D-day is only a few weeks away. Arnav Pandya examines your chances of saving your hard-earned money in these taxing times
Publication:Economic Times Bangalore; Date:Feb 20, 2006; Section:ET Big Bucks; Page Number:17
IT’S the last couple of months of the financial year and the countdown has begun. These months are taxing for most people as the scramble for making the requisite tax-saving investments reaches a climax. With each passing day, investors get pushed into a corner and in many cases end up making investments that are not the optimum or the best choice for them. ET Big Buckstakes a look at the situation with some guidance on how to go about this process.
The first thing that investors need to know is that each day is precious and hence, the earlier one starts the lesser the load will be at a later stage. The first step is to determine the total amount of such investment. One can divide the tax saving investments into two broad categories. One category includes the investments under Section 80C and Section 80CCC where the combined limit stands at Rs 1 lakh for the financial year ’05-06 while the second consists of other deductions like payment of medical insurance premium, donations etc.
The benefit of making the necessary investments is that of deduction from the taxable income. Now, with rebates being abolished from the tax provision, most of the benefits that are present are through the feature of deductions. Under a deduction, the amount of the benefit is reduced from the income to arrive at the taxable income and then the tax is calculated on the remaining part of the income. For example, if the income of an individual is Rs 3.4 lakh and there is deduction of Rs 90,000 that one is eligible for, then the taxable income comes to Rs 2.5 lakh on which the tax will be calculated.
The tax saving investment process also has to be brought in line with the overall financial planning for an individual because this part can also fulfil some of the objectives of the overall financial plan. First, consider the overall deduction of Rs 1 lakh. At this stage of the financial year, the individual can use the process of backward calculation to arrive at the figure that still needs to be invested.
Before other things, one has to look at the investment that is already made. For example, for a salaried employee there will be a contribution to provident fund, which is a compulsory deduction made each month from the salary paid. Another common investment many people make is the payment made each year as insurance premium or the tuition fees paid for children.
Many people run up quite a sum through such fixed payments and this makes the job of making the remaining investments a bit easier. The next decision to be made is whether the remaining portion of the investment required to finish the limit of Rs 1 lakh should go into debt, balanced or equity.
For those who are conservative and would not like to take much risk, the debt option is the route to follow. The age factor as well as the risk-taking ability will come into play here. Taking a bit of due diligence even within this can help an investor gain a bit. Lock-in period of the funds and the stability of returns along with the post-tax return figure are important factors to consider. For example, if one wants a steady earning rate, then the National Savings Certificate, which gives an 8% compounded semi-annually, will be a good option. However, in this case there is no payout and the individual will be able to get the return amount figure only at the time of maturity. On the other hand, the public provident fund scheme (PPF) will give a return of 8%, which is tax free and thus boosts the post-tax return figure. But there is no guarantee on the rate remaining at this level as it can change anytime in the interim period and from that date onwards the entire amount will be charged at the new rate. However, for most investors till the time PPF moves under the new exempt, exempt, tax (EET) system completing the maximum amount of Rs 70,000 allowed would be a preferable choice.
If one would like to go in for a slight element of risk then the hybrid option of pension schemes floated by mutual funds are a good choice. On the traditional front of insurance, one can select a policy only because the insurance is required and not because there is an investment to be made. Insurance companies are still strongly pushing unit-linked products, but investors need to make their own calculations to see whether these schemes suit them.
Finally, there is also an equity choice in the form of equity-linked savings schemes (ELSS) floated by mutual funds. These schemes invest their corpus in equity shares and there is a lock in of three years for investors. These are hot selling products at the moment because of the bull run in the markets and those who have put in money in the last three years in such schemes have seen very good returns. Anyone looking to invest in such schemes needs to know that there is chance of capital erosion in this area if the market and consequently the portfolio of the scheme show a negative performance.
Another point to note while investing in equities is that the investment should be regular and spread out so that there is not much risk concentrated in a single product. With just more than a month remaining in the financial year this might not be possible and hence investors might have to make do with just a couple of investments in the current financial year. This is a factor that one must consider while putting sums at this stage in ELSS schemes.
Apart from the basic Rs 1 lakh limit there are some other benefits that can be availed by individuals. Amounts paid as medical insurance premium up to Rs 10,000 in a year are allowed as a deduction for an individual and such coverage is a useful, if not a compulsory investment for people who are not covered for medical emergencies. Repayment of principal in education loans is also allowed as a deduction for individuals.
Another area where several people get a deduction and a benefit is by donations to specific institutions and trusts. These donations are eligible for a deduction at a certain percentage depending upon the institution to which the amount is donated.
