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 and you should choose one that fits into your overall financial plan. Allocate your 1 lakh limit across different Sec 80C options as dictated by your goals, following the same principles of asset allocation that apply to other investments.
The Belapurbased PSU bank employee wants to save for the education and marriage of his two daughters. Since these goals are 15-20 years away, he has been advised to invest in diversified equity funds. So, he has started an SIP of 3,000 in an ELSS fund, thus aligning his tax-saving investment with a long-term financial goal. ELSS funds serve a twin objective in my financial plan.
Are you ready for risk?
ELSS funds invest in stocks and carry the same risk as any other equity fund. 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 so when the Nifty has crossed 6,000 and is trading a tad above its long-term average PE of 18.
Small investors should not attempt to get on to the ELSS bus now—at least not in a lump-sum mode. If your risk profile allows you to invest in these funds, stagger your investments across 2-3 SIPs between now and 31 March.
The same logic applies to investments in Ulips. Putting a lump sum in equity through a Ulip is risky, especially when you are buying a single premium plans. The good thing is that unlike the ELSS funds, Ulips allow you an alternative asset allocation model. Put your money in the debt option instead of the equity fund in the Ulip and then gradually shift small amounts to the equity option. Most insurance firms allow 10-12 switches free of charge in a year. Similarly, avoid putting large sums into the NPS, especially if you have an aggressive portfolio.
New tax rules for insurance
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.
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%. Now, this is likely to fall to roughly 4-5%. 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.
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. Taxpayers wanting to invest in PPF are struggling because the government has abolished the commission payable to agents for opening new 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 yield of government bonds.
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 10-year bond yield is at 7.8% and could slip further to 7.77% by December.
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. With the annual average dropping to .25%, the PPF interest rate could be lower at 8.5% 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 rates.
The SCSS is especially the best option for senior citizens because it combines tax savings with regular income. Till 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. Now, Although he will get a tax benefit only on 1 lakh, he gains from locking in at a high rate of 9.3%. There is a possibility of the interest rate coming down in April 2013.
Posts
0 comments:
Post a Comment