Portfolio Management |
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One of the reasons for your investment portfolio not giving the expected returns could be - you have not properly planned to cover your tax liability. In this section, we present a comparision of investments which can reduce your tax burden.Most of us think of investing in tax only in the month of March and as the D-day approaches, there is a rush to invest in any tax-saving avenue – be it infrastructure bonds, ELSS schemes or PPF without any proper thought before investing. Ideally, investing for tax saving purposes, should be an integral part of your portfolio plan, helping you reach your investment goals in a tax efficient way. The number of tax saving options on offer not only serve the purpose of saving tax but also offer other benefits such as risk coverage, capital appreciation, retirement savings etc. In this section, we have attempted to give a comparison of the various tax-saving investments, which should help you make an informed and intelligent decision regarding your tax investments. The comparison is done in a group of two on the parameters of safety, returns, tenure and tax benefits. The argument behind grouping of those avenues is not very complicated; we just want to address the dilemma of much talked groups. For instance, one can ask whether investment in NSC is better when compared to Infrastructure bond. The grouping has not been addressed. In this section, we suggest those readers to compare in their own for these kind of grouping after taking a look at the arguments of the available grouping. |
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| Important features of all the tax saving schemes at a glance | |||||||||||||||||||||||||||||||||||||
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PPF vs. NSC: On the safety front both rank equally as they are government schemes and both investments give lump sum amounts on maturity. While considering interest calculation, though both offer a tax-free return of 9% p.a., NSCs score over PPF account in this case as the interest on NSCs is compounded every 6-months. The determining factors include, tenure of the investments and tax treatment of the interest earned. Investing in PPF, means locking your investment for a period of 15 years, however PPF offers the convenience of investing in small amounts at intervals rather than a one-time investment. The Fund also offers loan facility and the option of partial withdrawal after 7 years. Compared to this, NSCs are for tenure of 6 years with no premature withdrawal facility. Both the investments offer a tax rebate on a maximum investment of Rs.60,000/-, u/s 88 of the IT Act. However, the interest earned on PPF is totally exempt from tax, while the interest from NSCs is subject to tax exemption, subject to a maximum limit of Rs.9000/- u/s 80L. Where should you invest? PPF
is a popular retirement savings plan. So, if you wish to start saving for retirement then
you can begin by investing in PPF. If you are looking for an investment option, which
allows you to set aside an amount every year, without the commitment of a fixed amount or
fixed interval payments, then you can opt for a public provident fund. On the other hand,
if you have a certain amount of money, that you wish to keep aside, then National Saving
Certificates offer both safety and tax-free returns. Infrastructure bonds, such as those issued by ICICI and IDBI, rank second in comparison with PPF, in terms of safety as the safety of the bonds is determined by the rating they carry. The bonds are available only when the issue is open and the minimum inves tment in case of bonds is higher at Rs. 5,000/-, when compared to PPF. The interest offered va ries from 9.0% to 9.50% depending on the tenure, hence from the returns angle both the investments offer almost the same. The points where bonds score over PPF are the limit of investment for tax saving and tenure. While all other investments under section 88 offer a rebate on an investment of Rs.60,000/-, bonds have a higher limit of Rs.80,000/-. In terms of tenure, infrastructure bonds have the least lock-in period of 3 years, compared to any other tax saving instrument. Another benefit that bonds have over PPF is that one can receive interest income at regular intervals, while in the case of PPF, the interest accumulates in the account. However, the interest earned on bonds is subject to TDS and is exempt from tax upto a maximum of Rs.9,000/- only (as per section 80L), while the interest on PPF account is tax-free. Where should you invest? The short tenure of ICICI bonds makes it ideal for parking short-term funds and obtaining tax returns. As the lock-in period is just 3 years, a person can obtain maximum tax-rebate by reinvesting the maturity amount from the bonds. This way Rs.2,40,000/- invested in the first 3 years can save tax for all the coming years). However if you have a long-term investment horizon, then you should invest in provident fund. Bonds vs. Life insurance policies:The premiums paid on life insurance policies, subject to a maximum of Rs.60,000/-, offer a tax rebate u/s 88. Though the tenure of the policies is higher, they offer a number of associated benefits including the option of additional riders and assured returns. Insurance policies are also safer than bonds and offer tax-free returns and one can opt for a policy at any time of the year, unlike bonds, which are not available on tap. In the case of insurance policy, the premium to be paid is fixed and one has to make the payment for several years. For bonds, the investment amount can be varied every year. On the tenure front, bonds have a much lower tenure compared to insurance policies. Bonds offer a higher investment limit for tax savings, compared to life insurance. But the income from bonds is taxable, though interest income upto Rs.9000/- is tax-exempted u/s 80L. Where should you invest?Life insurance policies offer the benefit of providing risk coverage along with tax rebate. The different types of plans on offer such as money back plans, children’s plans, policies for women etc, make these plans ideal for planning to suit different goals. On the other hand, bonds offer only tax benefits. |
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IDEAS: Portfolio Planning |
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