Are you still trying to figure out ways to save tax? Tax saving is not as difficult as we think. We just have to be aware of things that we need to do to reap the tax benefits.
News18 Specials | Updated:July 3, 2017, 2:41 PM IST | news18.com
Are you still trying to figure out ways to save tax? Tax saving is not as difficult as we think. We just have to be aware of things that we need to do to reap the tax benefits. Also, it is crucial to declare investments at the beginning of the year to your employer so that accordingly, he can adjust the TDS (Tax Deducted at Source) and you get the tax benefits in advance rather than waiting for refund from the I-T Department.
Given below are 10 Ways to invest wisely and save income tax.
Home Loan: Paying EMIs for home loan can be a burden for you but the good news is that it can help you claim the tax benefits. You can claim the interest paid upto Rs.2,00,000/- on your home loan EMIs as an exemption from your taxable income. If you make any pre-payments to your home loan, then pre-paid principal upto Rs. 1,50,000/- can be claimed as a deduction.
HUF Account: If you are earning additional income apart from your salary, then it is taxable. However, if you open a Hindu Undivided Family account and show it under your HUF then you can save tax.
Tuition Fee Payment: We usually spend hefty amount of our income to pay for the education of our children. We can get tax rebate for the amount that we pay as tuition fee for upto two children.
Leave Travel Allowance: LTA given by your employer for the expenses that you and your family have incurred on travel within India can be claimed as deduction. It’s better to plan your vacation in advance and get the LTA benefits.
Health Insurance + Medical Expenses: You can claim tax benefit up to Rs.15,000/- for self, spouse and children and Rs.20,000/- for parents above 65 years of age. Additionally, you can claim upto Rs.15,000/- annually for medical expenses by showing genuine consultation and medicines bills.
Pension Funds: Fortunately, I-T laws provide you the opportunity to reduce your taxes if you are investing in pension funds.
Education Loan Repayment: Just like tax benefits available on tuition fee payment, you can also claim deduction for EMIs that you pay towards your Education loan. So investing in your education has more benefits than just upscaling your skillset.
Employee Provident Fund: Under section 80C, not only the interest, income and maturity amount of your EPF account is exempted from tax, but also the contribution that you make to the PF account can be claimed as deduction.
National Pension Scheme: NPS is one of the most secure investment options given by the postal department. You can claim tax rebate on the amount that you contribute to this scheme.
Donations for Charity: While donating for a charitable cause you not only get the inner peace but it also makes you eligible for tax exemption.
Babar Zaidi | May 8, 2017, 03.15 AM IST | Times of India
Though it was thrown open to the public eight years ago, investors started showing interest in the National Pension System (NPS) only two years ago. Almost 80% of the 4.39 lakh voluntary subscribers joined the scheme only in the past two years. Also, 75% of the 5.85 lakh corporate sector investors joined NPS in the past four years. Clearly, these investors have been attracted by the tax benefits offered on the scheme. Four years ago, it was announced that up to 10% of the basic salary put in the NPS would be tax free. The benefit under Section 80CCD(2d) led to a jump in the corporate NPS registrations. The number of subscribers shot up 83%: from 1.43 lakh in 2012-13 to 2.62 lakh in 2013-14.
Two years ago, the government announced an additional tax deduction of `50,000 under Sec 80CCD(1b). The number of voluntary contributors shot up 148% from 86,774 to 2.15 lakh. It turned into a deluge after the 2016 Budget made 40% of the NPS corpus tax free, with the number of subscribers in the unorganised sector more than doubling to 4.39 lakh. This indicates that tax savings, define the flow of investments in India. However, many investors are unable to decide which pension fund they should invest in. The problem is further compounded by the fact that the NPS investments are spread across 2-3 fund classes.
So, we studied the blended returns of four different combinations of the equity, corporate debt and gilt funds. Ultrasafe investors are assumed to have put 60% in gilt funds, 40% in corporate bond funds and nothing in equity funds. A conservative investor would put 20% in stocks, 30% in corporate bonds and 50% in gilts. A balanced allocation would put 33.3% in each class of funds, while an aggressive investor would invest the maximum 50% in the equity fund, 30% in corporate bonds and 20% in gilts.
Ultra safe investors
Bond funds of the NPS have generated over 12% returns in the past one year, but the performance has not been good in recent months. The average G class gilt fund of the NPS has given 0.55% returns in the past six months. The change in the RBI stance on interest rates pushed up bond yields significantly in February, which led to a sharp decline in bond fund NAVs.
Before they hit a speed bump, gilt and corporate bond funds had been on a roll. Rate cuts in 2015-16 were followed by demonetisation, which boosted the returns of gilt and corporate bond funds. Risk-averse investors who stayed away from equity funds and put their corpus in gilt and corporate bond funds have earned rich rewards.
Unsurprisingly, the LIC Pension Fund is the best performing pension fund for this allocation. “Team LIC has rich experience in the bond market and is perhaps the best suited to handle bond funds,” says a financial planner.
The gilt funds of NPS usually invest in long-term bonds and are therefore very sensitive to interest rate changes. Going forward, the returns from gilt and corporate bond funds will be muted compared to the high returns in the past.
In the long term, a 100% debt allocation is unlikely to beat inflation. This is why financial planners advise that at least some portion of the retirement corpus should be deployed in equities. Conservative investors in the NPS, who put 20% in equity funds and the rest in debt funds, have also earned good returns. Though the short-term performance has been pulled down by the debt portion, the medium- and long-term performances are quite attractive.
Here too, LIC Pension Fund is the best performer because 80% of the corpus is in debt. It has generated SIP returns of 10.25% in the past 3 years. NPS funds for government employees also follow a conservative allocation, with a 15% cap on equity exposure.
These funds have also done fairly well, beating the 100% debt-based EPF by almost 200-225 basis points in the past five years. Incidentally, the LIC Pension Fund for Central Government employees is the best performer in that category. Debt-oriented hybrid mutual funds, also known as monthly income plans, have given similar returns.
However, this performance may not be sustained in future. The equity markets could correct and the debt investments might also give muted returns.
Balanced investors who spread their investments equally across all three fund classes have done better than the ultra-safe and conservative investors. The twin rallies in bonds and equities have helped balanced portfolios churn out impressive returns. Though debt funds slipped in the short term, the spectacular performance of equity funds pulled up the overall returns. Reliance Capital Pension Fund is the best performer in the past six months with 4.03% returns, but it is Kotak Pension Fund that has delivered the most impressive numbers over the long term. Its three-year SIP returns are 10.39% while five-year SIP returns are 11.22%. For investors above 40, the balanced allocation closely mirrors the Moderate Lifecycle Fund. This fund puts 50% of the corpus in equities and reduces the equity exposure by 2% every year after the investor turns 35. By the age of 43, the allocation to equities is down to 34%. However, some financial planners argue that since retirement is still 15-16 years away, a 42-43-year olds should not reduce the equity exposure to 34-35%. But it is prudent to start reducing the risk in the portfolio as one grows older.
Aggressive investors, who put the maximum 50% in equity funds and the rest in gilt and corporate bond funds have earned the highest returns, with stock markets touching their all-time highs. Kotak Pension Fund gave 16.3% returns in the past year. The best performing UTI Retirement Solutions has given SIP returns of 11.78% in five years. Though equity exposure has been capped at 50%, young investors can put in up to 75% of the corpus in equities if they opt for the Aggressive Lifecycle Fund. It was introduced late last year, (along with a Conservative Lifecycle Fund that put only 25% in equities), and investors who opted for it earned an average 10.8% in the past 6 months.
But the equity allocation of the Aggressive Lifecycle Fund starts reducing by 4% after the investor turns 35. The reduction slows down to 3% a year after he turns 45. Even so, by the late 40s, his allocation to equities is not very different from the Moderate Lifecycle Fund. Critics say investors should be allowed to invest more in equities if they want.
HARSH ROONGTA | Tue, 13 Sep 2016-06:35am | dna
Despite all this, the detractors of NPS are many and the reasons are fairly significant.
On paper, National Pension System(NPS) has everything going for it. It is an extremely low-cost retirement mutual fund with fund management fees at very low levels. It also allows equity participation up to a maximum of 50% and requires the balance money to be invested in government and debt securities. This provides a healthy mix of high return equity with safe debt instruments. NPS also effectively locks in the investors’ money till they reach the age of retirement. This ensures that the investor does not take any short decision for this investment. It also allows the fund manager to invest with a longer-term horizon in mind, thus allowing better returns. The star advantage, of course, is the exclusive tax deduction of Rs 50,000 for investing in NPS which is over and above the Rs 1.50 lakh limit available under section 80C for other investments and expenses. For salaried employees, the employer can contribute up to 10% of the basic pay into the NPS without payment of tax. What should clinch the argument is the fact that the average return over the past 5 years is a creditable 12% per annum even if you had chosen in the worst-performing equity and debt funds available in the NPS.
Despite all this, the detractors of NPS are many and the reasons are fairly significant. First is the requirement for compulsory investment in buying an immediate pension plan from a life insurance company with at least 40% of the accumulated fund. The immediate pension plans available from life insurance companies are very limited and offer very poor returns around 7% p.a., which is also taxable. Second is the fact that out of the balance 60% (left after investing in compulsory pension plan) only 40% of the accumulated fund can be withdrawn tax free. The balance 20%, if withdrawn, will be taxable, thus reducing the return. Questions have also been raised about the very low fees that fund managers get which may affect the performance of the fund in the long run.
The argument for or against NPS thus rallies around whether the exclusive tax benefit provided initially outweighs the disadvantages of NPS at maturity. Proponents of NPS (and I am one of them) argue that the fears of taxation on the pension income are overstated as the income is spread over many years and you are likely to have low income in your retirement years leading to low or nil taxation rates. Also, the immediate annuity market cannot remain underdeveloped forever and should start offering competitive returns by the time you retire in a decade or more. Also, given the government’s commitment to promoting the NPS, the tax disadvantages of NPS are likely to reduce or disappear over time. The biggest advantage for unsophisticated investors is that the initial tax benefit will ensure that they diligently invest year after year which they may not otherwise do in a regular investment product.
Of course, I think both sides agree that investing in NPS over and above the exclusive tax benefit available for it makes no sense whatsoever currently. So invest in NPS, but only to the extent of the exclusive tax benefit available.
The writer is a chartered accountant and Sebi-registered investment adviser
Source : https://goo.gl/hd8xbA
K. R. SRIVATS | NEW DELHI | AUGUST 22, 2016 | The Hindu Businessline
Discussion paper likely in a month, says PFRDA member
If you are a National Pension System subscriber, soon you may get to dip into the pot for a home loan and realise the dream of having ‘pension with a house’ on retirement.
The Pension Fund Regulatory & Development Authority (PFRDA) is toying with the idea of allowing NPS funds to be used to support home loan needs of subscribers, said RV Verma, Member, PFRDA.
The regulator feels an NPS subscriber should be allowed to use the NPS corpus either directly or as a collateral for financing the house. This will be an improvement over the current regime, where any premature withdrawal means diminishing of balance.
“We are preparing a discussion paper on ‘Housing for NPS Subscribers’. Rather than allowing NPS contributions to flow into the capital market or specified securities, the same could also be used for supporting home loan needs of NPS subscribers. This discussion paper is expected to be ready in a month,” Verma told told BusinessLine here.
Any move to allow pension funds to be used for financing a home is expected to “reduce homelessness” in the country and is in line with the government’s objective of ‘Housing for All by 2022’. This facility will be available across the entire NPS subscriber universe — both government employees and non-government individual subscribers.
This idea of allowing NPS monies to fund home purchase could be a win-win for the government and subscribers. Besides pension and a house, subscribers will get fiscal benefits by way of tax breaks for contributing to the NPS corpus and also for repayment of housing loan principal and interest.
For the government, the benefit comes in terms of reduced allocation from the fisc towards house building advance, Verma said.
As on date, an NPS subscriber is allowed partial withdrawal — capped at 25 per cent of the contribution if he has been with the scheme for at least 10 years.
Babar Zaidi | May 16, 2016, 03.14 AM IST | Times of India
When Avinash Chandnani invested in the National Pension System (NPS) last year, he planned to put money in five different pension funds.However, when he was putting the second tranche of `10,000 in another fund, he realised that NPS investors can’t opt for two pension fund managers. He also couldn’t switch to another pension fund for a year.
Our story examines the performance of Tier I funds of the NPS and identifies the best pension funds. The performance of individual schemes does not give an accurate picture because investors put money in a combination of funds. So we looked at blended returns of four combinations of the equity, corporate debt and gilt funds.
Chandnani, for instance, is an aggressive investor, with 50% of his corpus in the equity fund, 30% in the corporate bond fund and 20% in the gilt fund. A balanced allocation would put 33.3% in each of the three funds. A conservative investor would put only 20% in stocks, 30% in corporate bonds and 50% in gilts. The ultra-safe investor would not invest in equities, put 40% in corporate bond fund and 60% in gilt.
The past 9-12 months have not been kind to aggressive investors. While bond prices have risen, the 50% allocated to equities has dragged down returns. But ultra-safe investors who stayed away from stocks or conservative investors who put only 20% in equity funds have earned good returns.
Playing safe has also helped NPS funds for government employees. These funds can invest up to 15% in equities but most have 8-10% allocated to stocks. They have given double-digit returns, thanks to interest rate cuts that have enhanced the value of long-term bonds.
Should you switch from EPF to NPS?
The healthy returns from the NPS come at a time when the interest rate of the EPF is being debated and the interest rate for PPF has been pruned to 8.1%. So, should you shift your retirement savings to the NPS?
A legislation to amend the Employees’ Provident Fund & Miscellaneous Provisions Act has been framed. The amendment allows EPF subscribers to make a switch to the NPS. Once he shifts to NPS, the employee will have a onetime chance to return to the EPF fold. The amendment also seeks to ensure that employers don’t force a scheme down the throats of employees.
However, the tax treatment of the NPS may prove a hurdle. While the EPF corpus is tax-free, this year’s Budget has proposed to make 40% of the NPS corpus tax-free. There is another problem. At least 40% of the NPS maturity corpus has to be put in an annuity to earn a monthly pension. Annuity rates in India are very low compared to what other options can offer. However, investors will face that issue much later. Right now, we identify the best performing funds for various types of investors.
ULTRA SAFE INVESTORS
Whether they invested through SIPs or a lump sum, risk-averse individuals have earned the highest returns. They stayed away from stocks and divided their NPS corpus between gilt funds and corporate debt funds. On average, gilt funds have given 9.75% annualised returns while corporate debt funds have churned out more than 11% in the past five years. Even in the short term, safe investors have been the biggest gainers.
Will the good times continue? The gilt funds of NPS are holding long-term bonds with an average maturity of over 19 years and a modified duration of about nine years. These funds have done well because interest rate cuts have pushed down bond yields. But experts say this trend will not stay forever. “Over a longer period, the portfolios will deliver returns similar to the yieldto-maturity of bonds in the portfolios,” says Manoj Nagpal of Outlook Asia Capital. The average yield-to-maturity of the bonds is 8%, which is higher than the PPF rate but lower than EPF. The average yield-to-maturity of corporate debt funds is higher at 8.25%, and their average tenure is also shorter at seven years. Ultra-safe investors should consider higher allocation to these funds.
Investors who allocated a small portion of their corpus to equity funds have also earned good returns. The best performing ICICI Prudential Pension Fund has given double-digit returns over 5 years.
Including 15-20% equity in your retirement portfolio is a sound strategy as an ultra-safe portfolio won’t be able to beat inflation in the very long-term. NPS funds for government employees also follow a conservative allocation, with a 15% cap on equity exposure.
These funds have also done fairly well. However, younger investors should not play too safe. They can afford to have a larger portion of their NPS corpus in equity funds. Also, it shouldn’t be assumed that bond funds won’t lose money. If interest rates rise, the NAVs of gilt funds holding long term bonds will slip.
Investors who spread their money across all three types of funds have not done too badly. Here again, the shortterm picture is rather bleak. But the medium- and long-term returns are reasonably attractive. ICICI Prudential Pension Fund is again the best performing fund for this allocation, with returns of 9.85% in the past five years.
The balanced approach, which puts 33.3% in each of the three classes of funds, suits most investors. It has the potential to give reasonably good returns in the long term without taking too much of a risk. The investor will need to change his allocation as retirement nears. There are several theories about how much the allocation to equities should be at different ages. Some planners say that it should be 100 minus your age. But the maximum equity allocation in the NPS is 50%. Besides, you might also have invested in other instruments for your retirement.
Investors who can’t take a decision should opt for the lifecycle fund of the NPS. Under this option, the investor’s age decides the equity exposure. The 50% allocation to the equity fund is reduced every year by 2% after the investor turns 35, till it comes down to 10%. The rebalancing happens every year. The PFRDA is considering more asset mix options for these lifecycle funds.
Equity funds of the NPS have not done too well. They have lost money in the past year and delivered lower returns than corporate debt and gilt funds in the past five years. This has dragged down the returns of aggressive investors who allocated 50% to equity funds. But this should not make investors ban this critical asset class from portfolios.
Till last year, equity funds were mirroring the returns of the index because pension funds were supposed to invest in proportion to their weight in the index. But from September 2015, fund managers have been allowed to invest in a larger universe of stocks and follow an active investment strategy that does not mirror the index.
Experts see this as a positive development because a predominantly largecap orientation would have prevented the NPS equity funds from beating the market. More importantly, poor quality index stocks can now be dropped.
Chandralekha Mukerji | Apr 25, 2016, 05.13 AM IST | Times of India
It is the time for annual appraisal letters and the bonus. Many of you might have got your tax refunds too.
While you may be happy to have some extra cash, handling it can be tricky. You need to juggle multiple aims and concerns to maximize your yearly perk. Here are suggestions for getting the most from that extra money .
OPTION 1: Reduce your debt burden
Before you start investing your surplus, pay off your debt. It could be outstanding credit card payments, car loan, personal loan, etc. Start settling your debt in the order of interest rates. The ones with no tax benefits and higher interest cost should be paid off first. Loans that offer tax benefits should be the last on your list.
OPTION 2: Invest in National Pension Scheme (NPS)
Upto Rs. 50,000 invested in the NPS, under Section 80CCD (1b), can be claimed as deduction, over and above the Rs1.5 lakh investment deduction limit under Section 80C. At the highest tax bracket of 30%, this could mean a savings of Rs 15,000 on your next tax bill. Under NPS, it is mandatory to buy an annuity plan with 40% of the corpus at maturity . The remaining 60% can be withdrawn. The Finance Minister has made withdrawals up to 40% of the corpus tax exempt, adding to NPS’ appeal.
OPTION 3: Increase equity exposure
The Sensex has fallen around 12% in the past year, and this provides an opportunity for long-term buyers. You can invest your lump sum in a debt fund and use a systematic transfer plan to move the money into equity funds. You could also earmark this corpus for a goal that is 5-10 years away. For instance, you can use the money towards increasing your down payment for an asset purchase and reduce your future loan burden.
OPTION 4: Invest for your daughter
If your daughter is less than 10 years old, Sukanya Samriddhi Yojana (SSY) is the best debt option to invest in for her future. At 8.6% yearly compounded rate, this is among the highest paying small savings schemes. Investment in SSY is tax deductible under Section 80C, and you can invest up to Rs1.5 lakh per financial year. The principal invested, the interest accumulated and the payout are all tax-free. However, you have to stay invested till your child turns 21.
OPTION 5: Build corpus to buy a house
An extra Rs. 50,000 in tax break has been introduced for first-time home buyers where loan amount is less than Rs 35 lakh and the property’s worth is not more than Rs 50 lakh. Use the bonus to increase the size of your down payment. It will bring down your loan requirement, which means lower EMIs and, if it falls below Rs 35 lakh, there’s the extra tax benefit as well. Put the bonus in an income fund if purchase is less than a year away.
OPTION 6: Build an emergency corpus
If you do not have an emergency fund, you should use your bonus to build one.You should invest the money in highly liquid options such as short-term debt funds. The corpus will help you manage sudden, unplanned expenses.
Source : http://goo.gl/QPXcFx
By Babar Zaidi, ET Bureau | Mar 14, 2016, 10.30 IST | Economic Times
The 31 March deadline is barely two weeks away, but many taxpayers are yet to sew up their tax planning for the year. Either they were unfamiliar with the tax rules, confused by the array of options or just plain lazy. Whatever be the reason, they are now sitting ducks for unscrupulous distributors and financial advisers who capitalise on the approaching deadline and palm off high-cost investments to unsuspecting investors.
This week’s cover story is aimed at taxpayers who still have to invest under Section 80C. As a first step, calculate how much more you need to invest. Many taxpayers don’t know that tuition fees of up to two children is eligible for deduction under Section 80C. For many parents with schoolgoing children, this takes care of a large portion of their tax-saving investment limit.
Also, the principal portion of the home loan EMI and the stamp duty and the registration charges paid for a house bought during the year are all eligible for the deduction. If they include the contribution to the Provident Fund and premiums of existing insurance policies, they might discover that their tax planning is nearly taken care of. Use the table provided to calculate how much more you need to invest this year.
Put small amount in ELSS
Your approach now should be different from what we advised earlier this year. In January, we had listed ELSS funds as the best tax-saving instrument. They are low on charges, fairly transparent, offer high liquidity, the returns are tax-free and they have the potential to create wealth. Also, you are under no compulsion to make subsequent investments. Investing in ELSS funds is easy because you can apply online. Many fund houses even pick up KYC documents from your residence. You can also get your KYC done online.
However, at the same time, studies have shown that a staggered approach works best when investing in equity funds. It’s too late to take the SIP route in March and investing a large sum at one go can be risky. Investors who took the SIP route in top ELSS funds in 2014-15, have made money, but those who waited and invested lump sum in March 2015 are saddled with losses.
Unfortunately, not many investors understand the simple logic behind SIPs. Barely 15% of the total inflows into the ELSS category comes through monthly SIPs and nearly 25% of the total inflows are invested as lump sum in March. We suggest that you avoid putting a large sum at one go in ELSS funds and put only a small amount at this stage. It’s best to start an SIP after April in a scheme with a good track record.
PPF and FDs are safe bets
Unlike the ELSS funds, you can invest blindly in the PPF. If you already have a PPF account, just put the remaining portion of your Section 80C limit in it and be done with it. Opening a new account at this stage may not be feasible if you have to submit the proof of investment this week. Even if you manage to open an account, you will be cutting it too fine. If your investment cheque is not encashed by 31 March due to any reason, you may be denied the deduction for this year. Some banks like ICICI Bank allow online investments in the PPF, which is a better option than the offline route.
If you don’t have a PPF account, go for tax-saving fixed deposits or NSCs. They did not score very high rank in our ranking of tax saving instruments in January because the interest is fully taxable, which brings down the effective post-tax returns in the 30% tax bracket to less than 6%. However, with just two weeks left to go, they could be good options to save tax in a hurry. Sure, you will earn low returns, but there are no hidden charges or any compulsion to invest in subsequent years.
They will push you to buy insurance policies that can become millstones around your neck. Don’t sign up for insurance policies in a hurry. To make things easier for the buyer, the agent even does the paperwork. All the buyer has to do is sign the application form and write a cheque. But any investment that requires a multi-year commitment must be assessed in detail, so don’t let the agent force you into a decision.
In our January ranking, life insurance policies were at the bottom of the heap. Experts say it is not a good idea to mix insurance with investment. Buy a term plan for insuring yourself and invest in other more lucrative options than a traditional insurance policy that offers 6-7% returns. A costly insurance policy prevents you from investing for other goals. If you are paying a very high premium, it is advisable to turn the policy into a paid up plan. The insurance cover will continue but you can stop paying the premium.
Pension plans from insurance companies also rank very low. Even though 33% of the corpus was tax free on maturity, the low-cost New Pension System (NPS) was seen as a better alternative. Last year, the government announced an additional deduction of Rs 50,000 for investments in the NPS. This year’s Budget has made the scheme more attractive by making 40% of the corpus tax free on maturity.
Till a few months ago, opening an NPS account was considered an uphill task. You had to run around for weeks, even months, before the account became operative. This has now changed. Turn to Page 6 to know how you can take the online route to open an NPS account in just 25-30 minutes.
No proof? No problem
Salaried taxpayers are expected to submit proof of investment to their employers by mid-March. That window is nearly closed now. If you have not submitted the proof of your tax saving investments, TDS will be deducted from your March salary. But don’t let that stop you from investing now. If you are able to invest by 31 March, you can claim a refund of the excess tax deducted from your salary. However, you will get that money back only when you file your tax return in July.
Source : http://goo.gl/gZZqCR
By Babar Zaidi, ET Bureau|Mar 07, 2016, 06.33 AM IST | Economic Times
NEW DELHI: HR managers and CFOs struggling to retain talent without escalating wage costs might get help from an unlikely source this year. If companies roll out the New Pension System (NPS), their employees can save additional tax of up to 1-3% of their basic salaries. If a company puts 10% of the basic salary of an employee in the NPS, that amount can be claimed as a deduction under Sec 80CCD(2). This tax deduction is over and above the Rs 1.5 lakh under Section 80C and the new deduction of Rs 50,000 introduced last year under Section 80CCD(1b).
The NPS benefit can be rolled out along with the Employees’ Provident Fund. A company has to just rejig the compensation structure of its employees by including the contribution to the NPS in their total cost-to-company (CTC). The tax deduction is capped at 10% of the basic salary of an individual.
“A person with a basic salary of Rs 50,000 a month can reduce his annual tax outgo by up to Rs 12,360,” says Sudhir Kaushik, co-founder of Taxspanner.com (see table).
To be sure, the benefit under Sec 80CCD(2) is not new. It was introduced four years ago but has not found many takers in the industry.
Though a few large companies, including Wipro, offer this benefit, most others have ignored the measure because it entails changing the pay roll structure. “The NPS idea has to be first sold to the company before it can be offered to the individual.
Within companies there are multiple departments to be convinced,” says CR Chandrasekar, CEO of Fundsindia.com.
Another reason for the lukewarm response was the poor tax efficiency of the NPS. Up to 40% of the maturity corpus is mandatorily put in an annuity and the balance 60% was taxable. This year’s Budget has proposed to make 40% of the NPS maturity corpus tax free. That might nudge employers to include the NPS as part of their CTC structure. “They can reduce some taxable component of the pay package and put 10% of the basic salary into the NPS,” says Manoj Nagpal, CEO of Outlook Asia Capital.
If a company decides to roll out the NPS, the process is surprisingly simple. It just needs to register as a corporate with the National Securities Depository Ltd and submit a few documents. “The whole process takes barely 3-4 days,” says Sumit Shukla, CEO of HDFC Pension Fund.
But offering the benefit is one thing and convincing employees to opt for it is quite another. The NPS is a market-linked product which doesn’t guarantee returns. While putting 10% of the basic pay in the NPS will certainly cut tax, it will also reduce the take-home pay of the individual. Besides, individuals who opt for the benefit will also be sacrificing liquidity. The NPS corpus can be withdrawn only at the time of retirement or for specific emergency needs.
Meanwhile, last year’s budget had talked of giving employees the option to switch from the Employees’Fund to the NPS. This year’s budget has even proposed a one-time tax exemption for such a switch. But observers say these measures have little meaning until the EPF Act is amended to allow such a transfer.
Source : http://goo.gl/kNpSbP
Babar Zaidi | TNN | Jan 11, 2016, 08.57 AM IST | Times of India
Do-it-yourself tax planning can be rewarding and challenging. Rewarding, because you can choose the tax-saving instrument that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters—returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.
While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!
ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency. The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.
If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund. Last year was not good for equities, and even top-rated ELSS funds lost money. However, the funds are miles ahead of PPF in 3- and 5-year returns.
The SIP route is the best way to contain the risk of investing in equity funds. However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.
Opt for the direct plan. Returns are higher because charges are lower.
The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What’s more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.
Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.
The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of Rs 50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.
Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity. Right now, the income from annuities is taxed at the normal rate.
Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.
PPF AND VPF
It’s been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.
Allocate 25% of your pay hike to VPF. You won’t notice the deduction.
SUKANYA SAMRIDDHI SCHEME
This scheme for the girl child is a great way to save tax. It is open only to girls below 10. If you have a daughter that old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Accounts can be opened in any post office or designated branches of PSU banks with a minimum Rs 1,000. The maximum investment in a financial year is Rs 1.5 lakh and deposits can be made for 14 years. The account matures when the girl turns 21, though up to 50% of the corpus can be withdrawn after she turns 18.
Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.
SENIOR CITIZENS’ SCHEME This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a Rs 15 lakh overall investment limit.
If you want ot invest more than Rs 15 lakh, gift the amount to your spouse and invest in her name.
BANK FDS AND NSCs
Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the Rs 15 lakh limit in the Senior Citizens’ Saving Scheme.
Invest in FDs and NSCs if you don’t have time to assess the other options and the deadline is near.
Pension plans from insurance companies still have high charges which makes them poor investments. They also force the investor to put a larger portion (66%) of the corpus in an annuity. The prevailing annuity rates are not very attractive. Pension plans launched by mutual funds have lower charges, but are MFs disguised as pension plans. Moreover, they are debtoriented plans so they are not eligible for tax benefits that equity plans enjoy.
Invest in plans from mutual funds. They offer greater flexibility than those from life insurers.
Traditional life insurance policies remain the worst way to save tax. Still, millions of taxpayers buy these policies every year, lured by the “triple benefits” of life insurance cover, longterm savings and tax benefits. Actually, these policies give very little cover. A premium of Rs 20,000 a year will get you a cover of roughly Rs 2 lakh. The returns are very poor, barely 6% if you opt for a 20-year plan. And the tax-free income is a sham. Going by the indexation rule, if the returns are below the inflation rate, the income should anyway be tax free. The problem is that once you sign up for these policies, they become millstones around your neck.
If you can’t afford to pay the premium, turn your insurance plan into a paid-up policy.
By Abhishake Mathur | Apr 08 2015 | MyDigitalFC.com
Equity has always outperformed all other asset classes in the long run, across economies, including India. In the past 15 years, BSE Sensex has delivered a CAGR (compounded annual growth rate) of 11.50 per cent. Even if we were to make staggered investments — say for example Rs 1 lakh per year from January 1, 2000 for a period of 15 years — an investment of Rs 15 lakh would have grown to Rs 53.84 lakh as on December 31, 2014.
Investment vs investor returns: Despite the performance of equities, the perception of such returns among investors is far from its potential. There is a wide gap between investment returns (the return generated by equity and sometimes shown by performance of the indices like Sensex and Nifty) and investor returns (the actual return that an investor realises on his equity-linked investment). A recent study on investors in the US by Dalbar has shown that investors earn about five per cent less per year on an average. The investor experience is no different in India. The Sensex as an index has given a CAGR of 11.50 per cent in the past 15 years, as mentioned earlier. This is actually the average return that investors should have got during this period. However, this is not generally the experience that is talked about. Unlike the success stories of investing in real estate that are often talked about, equity investments are not discussed as much. Clearly, the reason is a wide difference between the actual experienced returns and the potential returns.
Handling of equity investments: The actual reason of why investor returns do not reflect the investment return is related to the way equity as an asset class is handled and the purpose for which it is invested in. The value of equity investment changes every day, there is almost a compulsive urge to track it every day. This, in turn, evinces emotions — sometimes to buy more, sometimes to sell prematurely, sometimes to overexpose the portfolio to equity, and at times, to completely exit, never to invest again.
No doubt, tracking of investments is important. However, taking any action should be backed by information and should be conscious. Decisions that are based on emotions are laced with biases and that is the reason why investor’s returns fall short of the actual potential returns of an investment, specifically in equities. Most investors who have done well have held their investments for long terms and, have not allowed their emotions impact their actions.
The other issue is that equity is also perpetual in nature, having no maturity date as such. Therefore, unlike a fixed deposit, where a decision has to be taken to invest maturity proceeds, in equities there is no particular time to review. This does create confusion in the minds of investors about when they should review or exit. The fact is, equity should be treated as an exposure rather than a product, and should be rebalanced rather than redeemed at regular intervals.
Purpose of investment: Equity investments are also seen as speculative investments. They are attached with a perception of doubling or tripling money quickly and not always as a means to create long-term wealth. The average holding period of equity investors is very short. For instance, the average holding period, in case of equity mutual funds, is under two years for 50 per cent of investors, as per the data by Amfi. In fact, a quarter of them have an average holding period of six months or less. The recommended purpose for which equity should be chosen as an investment is quite the contrary.
The longer you hold your equity investments, greater the return, since the volatility smoothens out as the holding period increases.
Budget 2015- NPS: The national pension system (NPS) has been given impetus by allowing an extra deduction of Rs 50,000. In addition, the budget proposal would allow employees to choose between NPS and EPF for their retirement corpus. These changes will move a part of long-term investments into equity and will also ensure that the investments are not redeemed frequently, so that investors can benefit from equity investments fully. It is also likely to have a multiplier effect as more investors become comfortable with the uniqueness of equity investments. These changes are not just important for channelising individual savings into creation of capital for businesses but also for individual investors to doubly benefit from the growth of the Indian economy.
(The author is Head – Investment Advisory Services ICICI Securities)
Source : http://goo.gl/IXlWMp
By Neha Pandey Deoras | Jan 12, 2015, 06.40AM IST |Times of India
ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here’s a look at these eight instruments.
The hike in the deduction limit under Section 80C means that a taxpayer can reduce his tax by up to Rs 15,000. But the higher limit may not be of much use if you don’t know which tax-saving option suits you best. ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here’s a look at these eight instruments.
There are compelling reasons why ELSS funds should be part of the equity allocation in a taxpayer’s investment portfolio in 2015. Returns in past three years 27.34%. They may be low on safety but they score full points on all other parameters. The returns are high, the income is tax free, the investor is free to alter the time and amount of investment, the lock-in of 3 years is the shortest among all tax saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option and the cost is even lower if you go for the direct plans of these funds.
Smart tip: Invest in the dividend option which acts as a profit-booking mechanism and also gives you liquidity. Dividends are tax-free.
For a lot of people, Ulip is still a four letter word. However, investors need to wake up to the new reality.
An ordinary Ulip is still a costly proposition for the buyer. But the online avatar of these marketlinked insurance plans is a low-cost option far removed from what was missold to investors a few years ago. The Click2Invest plan from HDFC Life, for instance, charges only 1.35% a year for fund management. Ulips can be used as a rebalancing tool by the savvy investor. He can switch from equity to debt and vice versa, without any tax implication. Buy a Ulip only if you can pay the premiums for the full term. Also, take a plan for at least 15 years. A short-term plan may not be able to recover the high charges levied in the initial years.
Smart tip: Don’t invest in the equity fund at one go.
Invest in a liquid fund and then shift small amounts to equity fund.
Budget 2014 also hiked the annual investment limit in the PPF. Returns 8.7%. Risk averse investors can now sock away more in the ultra-safe for 2014-15 scheme. The PPF scores high on safety, taxability and costs, but returns are not so attractive and liquidity is not very high. The scheme will give 8.7% this year but don’t count on this in the following years. The interest rate on small savings schemes such as the PPF is linked to the government bond yield and is likely to come down in the coming years.
Smart tip: Open a PPF account in a bank that allows online access. It will reduce the effort.
SR CITIZENS’ SAVING SCHEME
The Senior Citizens’ Saving Scheme (SCSS) is an ideal tax saving option for senior citizens above 60. Returns 9.2%. The money is safe and for 2014-15 returns and liquidity are reasonably good. However, the interest income received from the scheme is fully taxable.The interest rate is linked to the government bond yield. It is 1 percentage point higher than the 5-year government bond yield. Unlike in case of the PPF, the interest rate will remain unchanged till the investment matures.
Smart tip: Stagger your investments in the Senior Citizens’ Saving Scheme across 2-3 financial years to avail of the tax benefits.
The New Pension Scheme (NPS) is yet to become a popular choice because of the complex procedures involved in opening an account. Returns 8-11% in past five years. But investors who managed to cross that chasm have found it rewarding. NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those of the Nifty, while corporate bond funds and gilt funds have given close to double-digit returns. But financial planners believe that the 50% cap on equity investments is too conservative. The other sore points is the lack of liquidity and taxability of the income. The annuity income will also be fully taxable.
Smart tip: Start a Tier II account to benefit from the low-cost structure of the NPS.
BANK FDS, NSCS
Bank FDs and NSCs score high on safety, flexibility and costs but the tax treatment of income drags down the overall score. Returns 8.5-9.1% for 2015. The interest rates are a tad higher than what the PPF offers but the income is fully taxable at the slab rate applicable to the individual. They suit taxpayers in the 10% bracket (taxable income of less than `5 lakh a year). The big advantage is that these are widely available. Just walk into any bank branch and invest in its tax saving fixed deposit.
Smart tip: Build a ladder by investing every year.After the fourth year, just reinvest the maturity amounts in fresh deposits.
Pension plans from insurance companies remain costly investments that are best avoided. Returns in past three years 8-18%. Instead, it may be a better idea to go for retirement funds from mutual funds. They give the same tax benefits but don’t force the investor to annuitise the corpus on maturity. He is also free to remain invested beyond the age of 60. Till now, all the pension plans were debt-oriented balanced schemes.Last week, Reliance Mutual Fund launched its Reliance Retirement Fund, an equity-oriented fund.However, ELSS schemes and Ulips can be used for the same purpose.
Smart tip: Wait for the launch of retirement funds and assess their performance before investing.
Traditional insurance plans are the worst way to save tax. Returns 5.5-6%. They require a multi-year commitment and give very poor returns. The insurance for 20 year regulator has introduced some plans customer-friendly changes but these plans still don’t qualify as good investments. The only good thing is that the income is tax free. But then, so is the income from the PPF and tax free bonds. Another positive feature is that you can easily get a loan against such policies, which gives some liquidity to the policyholder.
Smart tip: If you have a high-cost insurance plan, turn it into a paid-up policy to ease the premium burden.
Source : http://goo.gl/lAQFGL