tax planning options
Tax Saving Options Under Section 80C
s the end of financial year approaches investors are suddenly woken up to the existence of Income Tax department. If you haven’t done the tax planning in advance then this is the time to carefully select the investment products under section 80C. A wise investment will not only lessen the tax burden but also give some good returns.
What is Section 80C?
Under section 80C of the Income Tax Act, certain investments are deductible (up to a maximum of Rs 1 lakh) from income. This tax exemption is available across tax brackets. If you earn Rs 4 lakhs per annum and make investments of Rs 1 lakh in 80c instruments then the taxable amount will be Rs 3 lakhs. It is not at all complicated and the following chart simplifies even more.
Fixed Income instruments, which offer fixed returns, are suitable for risk averse investors who want to protect their investment from the uncertainties of the market. All these instruments are backed Govt and hence they are almost risk free. But the returns are just enough to beat the inflation and you should not expect any meaningful appreciation in investments. Per annum returns will vary from 6% to 10% depending upon the instrument you choose.
Market Linked: Market linked products like ELSS (Equity Linked Saving Scheme) and ULIPs (Unit Linked Insurance Plan). These instruments invest the money in equities (Except some debt based ULIPs) and hence there is an inherent market risk. However it has been seen that over a long period return from equities beat inflation by a comfortable margin and create wealth for the investor.
ELSS is similar to mutual fund except that it has a lock in period of 3 years. The money is invested into diversified stocks by a fund manager/AMC. On the other hand ULIPs are a form of life insurance where a part of the premia is invested into equity or debt market (or combination of two). ULIPs usually have longer lock-in periods.
ELSS: ELSS has some advantages over other investments and people with moderate to high risk appetite should consider them seriously.
· Lock-in period of 3 years.
· SIP (Systematic Investment Planning) available
· Diversified equity investments
· Different funds for different risk profiles in terms of exposure to large cap, mid cap and small cap
· Dividend paid out is tax exempt
· At maturity the proceeds are exempt from long term capital gains tax
Here is the list of best ELSS to invest this financial year.
To sum up
Section 80C benefit has been provided to encourage long term savings and investments. You should choose a combination of fixed income and market linked investments depending on your age and risk profile. For example if you are in your 20s, give a higher allocation to ELSS whereas if you are nearing retirement, concentrate more on fixed income investments.
But remember that Investment is to be done keeping your overall financial situation and future goals. Tax advantage is just a benefit on the way. Never make investments just for saving tax.
About the Author
Investment Yogi is India’s Leading Financial Planning and Investment Planning Adviser which offers advice on Income Tax Planning, Mutual Funds, Tax Planning in 2010, Home Loans, Fixed Deposits etc.
Is icici prudential tax plan a good investing option at this moment of time?
I am planing to invest 2k per month and inaddtion save some tax too.. Is icici tax plan a better option compared to other schemes available?..It has tax growth plan (NAV 93.49) and tax divident plan(NAV ~ 11)… What is the basic diffrence b/w two?… for the last one year its doin bad –RETURNS only 2.59.
so should i take the plan?.. as the market is down NAV will b very low at this time and hence i can purchase more units.. so is it the right time to buy this mf?…… if i ever plan to take it up which one should i go for?.. dividend or growth?….
Thanks in advance pals
This is certainly a good time to start getting in -but into the best of the funds. And don’t put all your money in one go . If you are a first-time investor then go for monthly SIPs.Over the year your costs will average out. Otherwise allocate 20% of funds at a time- market can certainly slide lower -who can tell- and you shouldn’t be wringing your hands, having allocated all your money upfront. Its much better to be patient and satisfied with above-average to high returns than trying to maximise all the juice at one go!
Now, ICICI Prudential Taxgain is a high risk/high return Fund. Its track record is certainly good over a longer time horizon like 5 years but has fared poorly in the last year -so have the whole category of Tax saver or ELSS funds, but it has fared much worse than the category average over 1 year and 3 year periods. Only the 5 yr track record is better than the category average. check out the record at http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=640
There is a reason for its volatility -the High risk-high return strategy. In a nutshell, this is not among the best ELSS funds; this fund has the calibre to reward you well but it will definitely test your nerves. Therefore, invest in it only if the ups and downs of the stock markets do not bother you much. Read complete analysis of the fund at http://www.valueresearchonline.com/funds/fundanalysis.asp?schemecode=640
Now if I were you, I would try to identify the best ELSS fund. I can easily do that by checking the Top funds at http://www.valueresearchonline.com/toprated.asp
Currently SBI Magnum Taxgain and Sundaram BNP Paribas Taxsaver are rated as 5-star ELSS funds. So I would like to investigate the fund more, check out its track record and compare with above from http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=198
and http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=687
and http://www.valueresearchonline.com/funds/fundanalysis.asp?schemecode=687
Now for choice between Dividend plan and Growth plans.
Most mutual fund schemes come in three options – dividend, dividend reinvestment and growth. The fact that under the dividend option the fund keeps on declaring regular dividends and no such payments accrue under the growth option might suggest to some investors that the former are more yielding. However, the truth is that it does not make a dime of difference which option you choose, from the pure investment-yield point of view. The form in which you choose to receive the gains might have tax implications though.
When your fund pays out a dividend all it has done is – paid out the gains it has generated instead of accumulating it. So now the onus of investing this money falls back on you. Moreover, any dividend paid means that the fund pool is smaller by the amount of the payout and this is reflected in the lower NAV. Had the fund not paid the dividend, it would have been reflected in the higher NAV of the fund and as a result the value of the units held by you would have appreciated which you would have realised on redemption. Under the dividend reinvestment option, the same dividend amount as paid under the dividend option is paid. However, instead of an absolute amount, the dividend is paid in the form of higher units issued to the investor.
There is a caveat, though. Investors should opt for that option that minimises their tax liability. If dividend income is tax-free (as is the case with dividends from equity funds), then the dividend option or the dividend reinvestment option is a good bet. If capital gains are tax-free (as is the case currently with equity-oriented funds) then choosing the growth option would probably be more viable. If both are tax-exempt, the net returns will be identical from any option.
Hope this comprehensively answers your query and similar questions others may have had about such choices to make while investing inf Mutual Funds!
Good Luck!
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