Sunday, February 08, 2009
The Public Provident Fund (PPF) offers tax exemption on the invested amount, there`s no tax on the interest earned, and even withdrawals are tax-free. Most importantly, the PPF is a government-sponsored scheme and is, therefore, completely safe.
The various tax-saving avenues under Section 80C can be used by individuals to suit their financial needs. We analyse the available options.
This is everybody's favourite tax-saving option and it's no surprise. The Public Provident Fund (PPF) offers tax exemption on the invested amount, there's no tax on the interest earned, and even withdrawals are tax-free. Most importantly, the PPF is a government-sponsored scheme and is, therefore, completely safe.
The other huge attraction of the PPF is that you can take a loan from the account in the third year or make partial withdrawals after the sixth year. The loan can be up to 25% of the balance in the account and has to be repaid in not more than 36 EMIs. Of course, if the thought of paying a 12% interest on your own money is galling, you can opt for a partial withdrawal after the seventh year.
PUBLIC PROVIDENT FUND (PPF)
The old faithful | Maximum limit: Rs 70,000
Not locked up for 15 years
When possible Limit
Loans In 3rd financial year 25% of balance in account at end of first year
Partial withdrawals In 7th financial year 50% of balance in account 3 years previously or in previous year
March 31 is the cut-off date for calculating the balance for the year.
You can withdraw up to 50% of the balance in the account that was present three years previously or in the previous year, whichever is lower. The end of the financial year (March 31) is taken as the cut-off date for calculating the balance. So, if a PPF account was opened in 2002-3, then the first withdrawal can be made during 2008-9 and the amount will be limited to 50% of the balance on 31 March 2005 or 31 March 2008, whichever is lower. This facility is particularly useful if you're facing a cash crunch. Simply withdraw from the PPF account and reinvest.
However, don't go overboard while investing in PPF. In the long run, its returns will never be able to match the phenomenal potential of an equity-based option. If you can stomach a little risk, don't put too much in this low-return avenue.
1. Completely safe
2. 8% assured returns
3. Income is tax-free
4. Contribution is flexible
1. Returns lower than prevailing FD rates
2. Withdrawals limited
3. Locks up capital for the long term
Best Suited For
Risk-averse investors, self-employed professionals and those not covered by the EPF.
FIVE-YEAR FIXED DEPOSITS
Returns are high, but taxable | Maximum limit: Rs 1 lakh
Best five-year FD rates
Bank Interest Rate (%) Post-Tax Yield (%)
ICICI 9.0 7.85
Oriental Bank of Comm 9.0 7.85
Indian Overseas Bank 9.0 7.85
Bank of Baroda 8.5 7.32
Axis Bank 8.5 7.32
Post-tax yield for an investor in the highest tax bracket
Never judge a book by its cover, they say. Or the suitability of an investment option by its advertisement. Banks are crying themselves hoarse with offers of attractive rates of interest on fixed deposits.
At 9%, the returns offered are higher than what your PPF contribution earns. But then, as another cliche goes, if it's too good to be true, it probably is. In this case, the income earned on the fixed deposit is taxable; it is added to your income for the year and is taxed at the applicable rate. So, if your income is in the 30% tax bracket, the post-tax return from the fixed deposit is actually lower than what the PPF offers.
There's also the vital issue of safety. Banks are perceived as safe havens. But in 2008, we saw that even these safe havens can fall. So, steer clear of little-known private and cooperative banks that offer great rates. If they fold up, your money is gone. Stick to public sector banks and well capitalised private entities. They might offer rates that are a tad lower, but at least your capital will be safer.
Fixed deposits are suitable for retired taxpayers and those with an income of less than Rs 3 lakh a year. At that income level, the tax rate is only 10% (plus 3% cess), which still leaves a lot on the table for the investor. Retirees have another option in the Senior Citizen's Savings Scheme.
1. Attractive returns of 9%
2. Widely available
3. Shortest lock-in (5 years) among debt options
1. Income is taxable
2. Safety not assured
3. May not match returns from equity over 5 years
Best Suited For
Senior citizens who don't want to go in for long-term options; those in low tax bracket.
EQUITY-LINKED SAVING SCHEMES (ELSS)
Rewarding for risk-takers | Maximum limit: Rs 1 lakh
The five best schemes
Scheme NAV (Rs) Returns in 6 Months Returns in 1 Year Returns in 3 Years
Sundaram Paribas Taxsaver 23.57 -22.04 -49.05 4.56
Canara Robeco Tax Saver 11.13 -19.11 -48.17 4.42
Principal Personal Taxsaver 46.43 -38.94 -62.53 1.79
Sahara Tax Gain Fund 17.00 -20.75 -50.01 1.37
Franklin India Taxshield 96.00 -25.21 -50.50 -0.46
-31.26 -56.86 -4.73
Returns as on December 26, 2008. Three-year returns are annualised.
Equity-linked saving schemes were seen as the best things since sliced bread till the markets crashed. Today, the same investors who went to town recommending ELSS to their friends and family are sitting tight; some of them have stopped their SIPs. After all, who wants market-linked returns when the market has more than halved in value in 12 months?
But this is exactly why you should give ELSS a chance. "To make money in equities, one has to jump in when there is an overwhelming fear because that's when a lot of assets get undervalued due to irrational pessimism," says Ajay Bodke, senior fund manager, equities, IDFC Mutual Fund.
Experts are unanimous that the stock prices would revive after some time. "The markets are likely to bottom out in a couple of months. After this, there could be a phase of very low activity and a revival may happen some time during October-December. Therefore, the best time for investing is between now and April," says Jayesh Shroff, fund manager, equity, SBI Mutual Fund. If you intend to invest in equities in 2009 and still have some tax planning to do, ELSS funds should be your first choice.
Yes, of course an ELSS carries the same risks as an equity fund. But the risk is not high if you are a long-term investor who doesn't get spooked by notional losses. "Fear and greed linked to short-term market movements eventually lead to mistakes. Last year's trend in equity markets should not come in the way of regular, steady investing," says Anup Maheshwari, executive vice-president and head of equities & amp; corporate strategy, DSP BlackRock Investment Managers.
Analysts also believe that the markets will continue to be volatile in the short to medium term. The best way to beat volatility is by taking the SIP route which averages out your cost of purchase.
1. Stock markets at a low
2. All income is tax-free
3. Short lock-in period of three years
1. Returns and risk are market-linked
2. Investor cannot exit even if markets crash
Best Suited For
Investors with a longterm horizon who are not averse to taking calculated risks.
UNIT-LINKED INSURANCE PLANS (ULIPS)
Not for short-term investors | Maximum limit: Rs 1 lakh
Short-Term Gains Long-Term Gains
Ulips Nil Nil
Equity funds 15% Nil
Debt funds Marginal rate 10%
What is a Ulip? To the short-term investor, it is a high-cost mutual fund that charges an entry load of 30-40%. To the long-term investor, it is a useful asset allocation tool. To the savvy investor, it is a great way to time the market by switching in and out of equities without paying any short-term capital gains tax. And to taxpayers, it is an investment plan that gives tax benefits, insurance cover and the possibility of great returns.
So why are so many Ulip investors planning to change them to paid-up policies? Thanks to the market crash of 2008, the value of the corpus invested in equities has almost halved. But, says Anuj Agarwal, CFO of SBI Life Insurance: "Over an investing horizon of 20 years, the crash of 2008 will be a small blip."
Clearly, Ulips are not for short-term investors. Invest only if you plan to continue with the policy for at least 10-12 years. Before that, the Ulip may not be able to recover the high charges that are levied in the initial years. While mutual funds charge an entry load of 2-2.5% (and even that is waived for direct investors), Ulips charge up to 40% in the first year, 20-25% in the second year and 5-10% in the third year. "Ulips are ideal for individuals who are willing to take a higher risk to seek a higher return," says Manik Nangia, corporate vice-president and head of product management, Max New York Life Insurance.
Use the switching facility in the Ulip pro-actively to rebalance your portfolio.
If you don't want to pay high initial charges, use top-up facility to increase investment.
Invest only if you can continue for 10-12 years. Before that, a Ulip may not be viable.
Ulips score over ELSS funds because they allow switching between the equity and debt options. Investors can change their asset allocation depending on the market movement. And they don't pay any capital gains tax on this. Some plans, such as the Horizon Automatic Allocation Plan from SBI Life Insurance, even reallocate the corpus based on the life stage of the policyholder. A young person may have a bigger portion of his corpus invested in equities, but as he grows older the plan gradually shifts funds from equity to debt.
1. Investors can switch between stocks and debt
2. All income (short-term and long-term) is tax-free
3. Short lock-in of 3 years
1. Initial charges of 30-40%
2. Returns and risk are market-linked
3. Lucrative in the long term
4. Can't switch insurers
Best Suited For
Pro-active investors who want to rebalance investment portfolios without attracting capital gains tax.
Should be bought for protection, not to save tax | Maximum limit: Rs 1 lakh
High-cost, low returns
Scheme Traditional Policy Term Plan-PPF Combo
Endowment Plan Term Plan PPF
Premium 12,000 3,500 8,500
Insurance cover 3 lakh 10 lakh Nil
Corpus on maturity 9 lakh Nil 10 lakh
Premiums for a 30-year-old for 30-year plans.
The term plan-PPF combo gives you a higher cover and a bigger corpus on maturity.
The fourth quarter is a busy season for insurance companies. That's when they conduct almost 35% of the total business for the year. Till a few years ago, this figure was as high as 50%, clearly showing that customers were buying insurance policies not as a risk cover but as tax-savers. The tax benefits on a policy are meant to reduce the cost of life insurance. They should not be seen as an end in themselves.
Buying a policy only to save income tax defeats the purpose of life insurance and leads a person to make a sub-optimal choice. The premium will be the deciding factor, not the cover he gets from the policy.
If you have paid premiums for at least three years, you can surrender the insurance policy.
But surrender value is very low in the inital years. You may get only 30% of the premiums paid.
A better idea is to convert it into a paid-up policy. The cover continues but premiums stop.
If you must have insurance in your tax-planning basket, traditional plans such as endowment or money-back policies are not a great idea. As the table shows, a term plan-PPF combo is better.
However, if you already have a policy, you may have no choice but to continue with it till the end of the term. You could surrender it if you have already paid the premiums for three years, but the surrender value is very low and you may get only 25-30% of the premiums paid. If only a few years are left for the policy to mature, don't surrender.
A better option is to convert the plan into a paid-up policy. This means the life cover continues but you stop paying the premium. This amount gets deducted from the policy corpus every year.
1. Provides life insurance cover
2. Forces you to save
3. All income received is tax-free
1. Traditional policies offer low cover at high premium
2. Returns are low
3. Gives false confidence of adequate insurance
Best Suited For
Investors who already have traditional insurance policies; not a good option to begin now.
Planning for retirement | Maximum limit: Rs 1 lakh
The rising cost of living, higher life expectancy and the breakdown of the joint family system have made it imperitive to include a pension product in every financial plan. But the days of the defined pension benefit are over and we are now in a defined contribution regime, where our pension will depend on what we accumulate through the years.
If you do not get gratuity, up to 50% of the pension corpus can be commuted.
The New Pension Scheme to be launched this year will be open to non-government workers also.
Pension funds will soon be allowed to invest in more lucrative options.
The good news is that even if your employer does not offer you a pension plan, you can buy one from an insurance company. What's more, unit-linked pension plans offer greater transparency and control to the investor. One can choose a mix of equities and debt in the pension plan depending on one's risk appetite.
We must put in a word of caution here. If you are saving for retirement, don't take too much risk with the money. "If someone who is retiring this year had invested his money in an equity option of a pension plan last year, he would have been pauperised," says Vikas Vasal, executive director, KPMG. A balanced option, where the corpus is divided between equities and debt, is best.
A unit-linked pension plan is not as costly as a Ulip because it does not offer life insurance. But there are other things that an investor needs to keep in mind. On maturity, only 33% of the corpus can be withdrawn and is tax-free. The balance has to be used to buy an annuity from any insurance company, which will give a monthly pension. Incidentally, this pension is taxable.
Some mutual funds also offer pension plans. In most plans, the money cannot be withdrawn before the investor turns 58. Even if early withdrawals are allowed, you have to pay a penalty. The Templeton India Pension Plan, for instance, charges a hefty 3% exit load on amounts withdrawn before the vesting age of 58.
1. Creates a long-term retirement cushion
2. No tax on 33% of corpus commuted on maturity
3. Not bundled with life cover
1. Locks up money for the long term
2. Balance 66% of the corpus has to be put in annuity
3. Pension is taxable
Best suited for
Long-term investors who are not covered by the Employee Provident Fund or any other pension scheme.
HOUSING LOAN REPAYMENT
Reduces the cost of the loan | Maximum limit: Rs 1 lakh
Year Principal Repaid Tax Benefit*
1 58,175 17,453
2 64,906 19,472
3 72,417 21,725
4 80,798 24,239
5 90,148 27,044
6 1,00,579 30,000
7 1,12,218 30,000
8 1,25,207 30,000
9 1,39,694 30,000
10 1,55,858 30,000
*Assuming investor's income is in 30% tax bracket Rs 10 lakh loan at 11% for 10 years.
A major part of the Section 80C exemption is taken care of by the home loan repayment. The tax benefit will go up if the Rs 1-lakh limit is raised this year.
Three years ago, the interest rate on a home loan was around 8%. Now, it is 11.5%, which means an increase of almost three years in the loan tenure. You can either prepay a part of your loan or increase the EMI amount if you want to reduce the tenure. You might be tempted to increase the EMI amount, but then, that's likely to eat into the money you've set aside to invest in tax-saving schemes. Here's how you can have your cake and eat it too.
Take a joint loan with spouse, sibling or parent. This way, both co-owners of the property can separately claim tax benefits on the home loan.
Don't let the tax breaks tempt you to extend the tenure of your home loan. The shorter the tenure, the better it is.
The principal portion of a home loan EMI is eligible for deduction under Section 80C. As the table shows, your repayment of a Rs 10-lakh loan takes care of a sizeable chunk of the Section 80C limit in the first few years. By the sixth year, it completely does away with the need for any further tax-saving investments. So, even if you don't have surplus money to invest, your home loan repayment ensures that you don't lose out on Section 80C benefits. If you factor in this tax benefit and the deduction available under Section 24 on the interest paid on the home loan, the effective rate of interest comes down significantly.
What do you do if the principal repaid in a year exceeds the Rs 1-lakh limit under Section 80C? This is quite common because the average loan amount disbursed by the State Bank of India has risen from Rs 5.5 lakh in 1998 to almost Rs 18 lakh now. In such cases, it might be a good option to take a joint loan (preferably with a working spouse or even with a sibling or parent). That way, both co-owners can separately claim the tax benefits available on the home loan.
What many people don't know is that even the amount spent on stamp paper and registration of the property is deductible under Section 80C. That brings down the effective cost of the property itself.
Some investors let the tax breaks available on home loans guide their decision on the tenure of the home loan. They keep the EMI low and extend the tenure to claim as much tax benefit as possible. However, they overlook the fact that the interest cost sometimes outweighs the tax benefits.
THE TAX SLABS
Your investments under Section 80C are fully deductible from your taxable income. Find out your tax liability after the tax deduction.
Female taxpayers Senior citizens
Annual Income Tax Rate Annual Income Tax Rate Annual Income Tax Rate
Up to Rs 1.5 lakh Nil Up to Rs 1.8 lakh Nil Up to Rs 2.25 lakh Nil
Rs 1.5 lakh to Rs 3 lakh 10% of income above Rs 1.5 lakh Rs 1.8 lakh to Rs 3 lakh 10% of income above Rs 1.8 lakh Rs 2.25 lakh to Rs 3 lakh 10% of income above Rs 2.25 lakh
Rs 3 lakh to Rs 5 lakh Rs 12,000 + 20% of income above Rs 3 lakh Rs 3 lakh to Rs 5 lakh Rs 12,000 + 20% of income above Rs 3 lakh Rs 3 lakh to Rs 5 lakh Rs 7,500 + 20% of income above Rs 3 lakh
Above Rs 5 lakh Rs 52,000 + 30% of income above Rs 5 lakh Above Rs 5 lakh Rs 52,000 + 30% of income above Rs 5 lakh Above Rs 5 lakh Rs 47,500 + 30% of income above Rs 5 lakh
There is also a 3% education cess on the payable tax and a 10% surcharge on the total tax if the income exceeds Rs 10 lakh a year.
Tax sops on a necessary expense | Maximum limit: Rs 1 lakh
Tax benefit only on tuition fees paid to a recognised educational institution in India.
Playschools and private coaching classes not covered.
Benefit only for fees paid for two children of the individual.
Both spouses cannot avail of the benefit for the same child.
School and college fees seem to be rising inexorably, but there's no way you're going to compromise on your child's education, is there? Here's something to make those exorbitant fees a little less bothersome: you can claim tax benefits under Section 80C for tuition fees for up to two children. But remember, the tax benefits are only for fees paid to recognised educational institutions in India; playschools, foreign colleges and universities and private coaching classes do not qualify for the deduction.
Besides, the tax benefit is available only on the tuition fees and not on other charges or expenses. So capitation charges, admission fees, transport, etc, are also ruled out. Most importantly, the fees have to be for the taxpayer's own children and not siblings, nephews, nieces or grandchildren.
The other point that must be kept in mind is that this particular benefit cannot be availed of by both the parents. If there's only one child, only one of the parents can claim the tax benefits on the school tuition fee. Otherwise, each parent can claim the tax benefit for different children.
Supreme Court on Tuesday allowed MNC banks to charge hefty penal interest up to 49% on defaulted credit card payments, ending the respite that lakhs of card holders have had since September last year when the National Consumer Disputes Redressal Commission capped the penalty at 30%.
The SC stayed the apex consumer forum's directive to banks not to charge more than 30% interest on defaulted payments on credit card purchases. The SC had last year refused to heed the appeal of banks against the NCDRC's order.
A Bench comprising Justices B N Agrawal, G S Singhvi and Aftab Alam suspended on Tuesday the relief to card holders on a plea by a coalition of foreign banks - Citibank, HSBC, American Express and Standard Chartered - that their business was suffering immensely because of the "unwarranted" cap on the quantum of penal interest.
Hopes of some populist tinkering before the Vote on Account (Feb. 16) and expectations of a stimulus package seem to have done the trick for the bulls on Friday. But, the financial and economic turmoil that has ripped all major developed countries continues to rampage emerging economies like India.
Concerns pertaining to liquidity crunch, weak IIP numbers and downgrades in GDP growth have overshadowed positive measures taken by the Government like substantial easing of interest rates and the fiscal stimulus packages.
Poor corporate earnings, deteriorating external trade situation and asset quality in banking sector are some concerns that will exert pressure in the medium term. Next week will bring in the IIP numbers. However, a lot will still hinge on the global market performance where banks and their bailouts would be in focus.
Tata Motors Ltd. clarified a newspaper report that it was facing troubles in making payments to its vendors and suppliers due to tight credit conditions and dwindling sales volumes. Three-quarters of dues to vendors have been paid immediately through an arrangement with banks, Ravi Kant, the company's Managing Director said. For the remaining 25%, there could have been some delays, said Kant, adding that the company was in constant dialogue with the vendors. "We have created a vendor council. All problems with vendors are being discussed and all mutual solutions are being worked out," he told reporters in Mumbai. But, Kant declined to detail the outstanding amount or when the payments will be made. Tata Motors' stock took a beating on Thursday after a business daily reported that the company owes more than Rs12bn in unpaid dues to its suppliers accumulated over the past few months. The company's stock fell to the lowest in more than two months.
Tata Motors has stopped making payments in the last few months and cut orders for parts amid plunging sales, the financial newspaper reported, citing an unidentified official at a New Delhi-based electrical-components supplier. "There could be some delay in payments (to vendors and suppliers). We are in a difficult situation, the whole industry is," Kant said. "There is a liquidity problem that is affecting everybody," he added. But, demand for new vehicles seems to be picking up after the announcement of the fiscal stimulus packages and the aggressive rate cuts effected by the Reserve Bank of India (RBI) to limit the damage on the Indian economy from the global recession. "The worst is over," Kant said. "We are on an upward path. How fast we will climb up is difficult to say," he said. The Tata Motors MD said that the Indian commercial vehicle market was witnessing some recovery after a rough patch between October and December.
"We have seen improvement in sales in January. It is expected that February will be better than January and first indications are that March will be even better. As sales begin to increase, vendor purchases will also improve and a positive cycle will once again get created. Our credit period for vendors is between 30 and 60 days," Kant said. "Whatever happened in the October to December quarter was the bottom of the cycle, and the company is cautiously optimistic about the future," he said. Tata Motors has collected Rs6.1bn through fixed deposits till date and the company has adequate working capital, he added. On the Feb. 05 article in The Economic Times, Kant said the story painted a wholly unrealistic picture and was sensationalizing the matter beyond all proportions. "We do not agree with it. Tata Motors is conducting its business properly, adequately, and in full partnership with all its vendors."
Satyam Computer Services Ltd. announced that the Board of Directors has appointed A.S. Murty as the new Chief Executive Officer, effective immediately. Murty is a Satyam veteran of 15 years, who has been in its forefront since Jan 1994. The Board also appointed Homi Khusrokhan and Partho Datta as Special Advisors, to assist in Management and Finance areas, respectively. These decisions are aimed at quickly stabilizing the company, Satyam said in a statement. The organization has visibly increased its focus on business continuity for its customers and confidence building amongst its employees and vendors, it added.
Murty joined the company in 1994 and has worked across several businesses and functions. His immediate task is to address the concerns of its clients and retain employees. He said he will be working very closely with the Board, Advisors and all Satyamites, to restore the company to its well-deserved glory. "We will chart a precise and practical 30 - 60 - 90 day plan that will encompass and address the interests of all stakeholders," Murty said.
The board also confirmed receiving bank sanctions for a total sum of Rs6bn (US$130mn approximately) as a planned fund infusion towards working capital requirements. This funding, along with healthy collections, is expected to help the company tide over its financial challenges. Satyam also reaffirmed that January salaries (globally) and the fortnightly salary in February (for US based associates) have been met from its internal accruals. "Completing the complex financial restatement exercise including announcement of Q3 results and ensuring prudent financial operations will be the primary focus in the next few weeks," Datta said.
Separately, Kiran Karnik, the former president of India’s software industry body NASSCOM, was named chairman of Satyam, Company Affairs Minister Prem Chand Gupta said. He also said that the Government was probing 325 companies and 25 persons linked to the Satyam scam.
Meanwhile, iGate Global Solutions, one of the potential suitors for Satyam, has dropped out of the race to acquire the troubled software services company. iGate CEO Phaneesh Murthy said that his company was not interested in pursuing the deal in its current form where Satyam’s financial position is unclear and the government has not capped its liabilities.