Find out in the ET Wealth RICS report
Updated: Dec 16, 2016, 05.37 PM IST | Economic Times
ET Wealth Survey Series is an effort to bridge the gap between industry, marketers and consumers. It is a well-researched effort to identify the vacuum that exists in the consumer personal finance space. With ET Wealth Surveys, we want you to know better how your audience earns, spends, invests and saves.
Of the universe of 156 million urban internet users, given here is the estimated size of each investment product:
Jignesh Shah – Capital Advisors | Jun 28, 2016, 09.36 AM | Source: Moneycontrol.com
How the PPF and ELSS score on various parameters. Here is how you can take an informed decision.
Recently one of my clients asked me – with 2.5% loss in Sensex over last one year, why not avoid tax saving mutual funds and instead go for investment in public provident fund? He has a point when we look at negative returns by stocks. But just one bad year, does not make tax saving funds a bad investment choice. There is much more one should ponder over before taking a decision.
Public provident fund (PPF) and tax saving funds (ELSS) are different products – former is fixed income instrument and the latter is an investment in stocks. ELSS can be a volatile journey and may not suit risk averse investors. However, it comes with the combination of two big advantages – lock in of just three years and a possibility of returns in excess of inflation.
PPF offers tax free assured returns in long term. But the returns may not remain attractive. The interest rate may drop below 8% given the falling interest rate regime we are into.
While some investors may want to include both these options in their portfolio, it makes sense to delve deeper into each one of them before you invest.
PPF – It is a scheme issued by the Government of India under the PPF Act of 1968. It is a fixed income security scheme that enables one to invest a minimum amount of Rs.500 and a maximum of Rs.150,000 per annum. PPF account matures after 15 years. So, the lock-in period for PPF investment reduces every year. Compared to this, with ELSS, every investment is subject to a fresh lock-in of three years.
Returns are not fixed. Interest rate for the year is notified by Ministry of Finance, Government of India. Interest rate for FY2016 is 8.7% p.a. and 8.1% for qtr ended Jun 2016, which is excellent for a debt product.
Individuals who are residents of India can ONLY open an account under the scheme. Only one PPF account can be maintained by an Individual, except an account that is opened on behalf of a minor. Thus, PPF account can also be opened by either parent under the name of a minor. However, each person is eligible for only one account under his/her name. Mother and father both cannot open Public Provident Fund (PPF) accounts on behalf of the same minor. Thus, in case a couple has two children, they can maximum open four accounts i.e. two in their own accounts and two in the name of their children under guardianship of either of the parent. Also, non-resident Indians (NRIs) are NOT eligible to open an account. However a resident who becomes an NRI during the tenure prescribed under Public Provident Fund Scheme, may continue to subscribe to the fund until its maturity on a non-repatriation basis. However, such an account will not be eligible for extension of five years at the time of maturity, if at the time of maturity, an account holder is an NRI. Since 13th May, 2005, Hindu Undivided Family can NOT open an account under the scheme. However, accounts opened prior to that date may continue subscription to their account till maturity. They also can not extend the account any further, after this date.
One can have guaranteed and tax free returns by investing in a PPF account. Currently, deposits under PPF earn interest of 8.10% per annum. PPF investments are tax deductible, along with the fact, that the returns are completely, tax free. The lock in period of the PPF scheme is as long as fifteen years and can be extended in block of five years after maturity. Partial withdrawals can be made on the commencement of the seventh year.
Since, the return in PPF is guaranteed and is backed by the government, there is low risk associated with repayment. However, any investor who parks too much money in fixed-income assets can face other types of risk such as inflation risk. A high rate of inflation would erode the value of your savings. There is an issue of liquidity too – should the investor need the money for some emergency it would be difficult since the PPF has a lock-in period of 15 years
Other Features –
1. Premature withdrawal of funds – PPFs give a hard time when it comes to withdrawing investments before the maturity of 15 years is done. Partial withdrawals are permitted from the seventh year.
2. Loans – Having lock-in periods of 15 years and being stable financial instruments, from the third year, PPFs can easily be used as collaterals for availing loans for vehicles, housing and other secured loans.
3. Investment Security – Provided by the Government of India, PPFs offer rates that rarely change in a major way and are one of the safest possible investments one can make in India.
After initial maturity of 15 years, you can extend your PPF account in block of 5 years.
PPF falls in Exempt-Exempt-Exempt (EEE) category. Interest earned and the maturity amount is exempt from income tax.
Now, let us look at ELSS –
Equity Linked Savings Scheme (ELSS), is an instrument of savings and investment managed by many mutual funds. It is a diversified equity mutual fund. A minimum investment of Rs.500 is required and it has no cap on the maximum investment. It has a mandatory lock-in period of 3 years, after which all the investment and the returns can be withdrawn. These investments offer tax free returns as long term capital gains on equity funds are tax free. dividend on equity based mutual fund is exempt from dividend distribution tax as well. Being equity market linked investments, these have a higher risk, but also present a better case of gaining more returns than any other savings scheme that relies on fixed income instruments.
Other Features –
1. Premature withdrawal of funds – Premature withdrawal of funds from ELSS investments is not allowed – not until the lock-in period of 3 years is over.
2. Loans – Equity Linked Savings Scheme investments are market dependent instruments and can only be used as collaterals for availing loans for vehicles, housing and other secured loans after the lock-in periods are over. Better rates can be availed on loans, if investments are pledged with banks that offer the particular ELSS schemes
3. Comparison of risk and returns –
Should you invest in PPF or ELSS?
Your investment choice should be guided by your investment objectives and your risk tolerance level and liquidity requirements. Investors with high risk tolerance should invest in ELSS, while investors with low risk tolerance should invest in PPF. Over a long time frame, wealth creation potential is much higher with ELSS. Young investors should opt for ELSS, since they usually have high risk tolerance and a sufficiently long time horizon to ride out the volatilities associated with equity investments. As you approach retirement, your risk tolerance goes down and PPF is a better investment option in such a situation. Investors with moderate risk tolerance level can invest in both PPF and ELSS in accordance with their optimal asset allocation strategy.
Salaried individuals are mandatorily required to contribute a portion of their salary to employee provident fund (EPF). The EPF interest rate is similar to the PPF interest rate and the maturity amount is tax free. The EPF contribution of the employee as well as PPF and ELSS investments goes towards the section 80C tax savings. If you are not a salaried individual and looking for some safe fixed income saving option, PPF can be considered.
Returns –ELSS is expected to offer better returns than PPF in long term. Currently, average 5 year compounded return for ELSS schemes is 13.31% pa and average 10 year compounded return for ELSS schemes is 12.86% pa. This is far better than PPF rate of return of more than 8%.
Risks – Over longer term, volatility (price risk) reduces significantly, in equity instruments. There is little risk of capital in PPF, as it is backed by Central Government of India.
When investing, investors must also consider shortfall risk. This is the risk that an investment’s actual return will not be sufficient to generate the money needed to meet one’s investment goals. That is why equity is so crucial in an investor’s portfolio because good equity investments over the long term do provide returns which outpace inflation. According to inflation.eu, the average CPI in India over the past 10 years has fluctuated in wide range of 5.7% (2016) to 12.11% (2010).
If investors invested all their money in fixed return investments like PPF, there is a very high probability that they would not save sufficiently for retirement, unless they were earning obscene amounts of money.
Also, the return in PPF has declined over the years. From 12% at the turn of the century, it dropped down to 11%, then 9.5%, 9% and finally 8%+ where is languished for many years. Between FY12 and FY15 the rate hovered between 8.6% and 8.7%. If you take the average inflation by year, the CPI from 2008 to 2013 has fluctuated between 8.32% and 12.11%. All in all, the PPF has not done an excellent job in consistently beating inflation over the last few years. You need some equity to create wealth.
To sum up, if you are willing to take up some risk go with an ELSS, otherwise it is the good old PPF makes a better bet.
Source : http://goo.gl/30NIYP
Babar Zaidi | TNN | Jun 13, 2016, 06.53 AM IST | Times of India
NEW DELHI: The first time Arjun Amlani used an online calculator to assess his retirement needs, he was shocked. The Mumbai-based finance professional, whose gross income was around Rs 10 lakh a year then, needed more than Rs 8 crore to fund his retirement needs. “The eight-digit number was too scary,” he says.
Figures thrown up by excel sheets and online retirement calculators can be intimidating. Here’s an example: if your current monthly expenses are Rs 60,000, even a conservative inflation rate of 7% will push up that requirement to over Rs 4.6 lakh in 30 years. To sustain those expenses for 20 years in retirement, you need a corpus of Rs 9 crore. To some investors, such enormous figures seem so unattainable that they just stop bothering about retirement. That’s a mistake.Retirement cannot be wished away. The paycheques will stop coming, and your living expenses won’t end but keep rising due to inflation. Worse, critical expenses like healthcare will be growing faster than overall inflation. The sooner you start saving for that phase of life, the more comfortable retirement will be.
The big question is: how can one build a nine-figure nest egg when the monthly surplus is Rs 15,000-20,000? Mutual fund sellers claim that an SIP of Rs 15,000 can grow to Rs 10 crore in 30 years. But this calculation assumes compounded annual returns of 15% for the next 30 years.It’s not advisable to base your retirement plan on such over-optimistic assumptions. Life insurance agents will offer plans that will give you an assured sum on retirement. But the returns they will generate are too low and the amount required will be too high. An endowment policy that gives Rs 10 crore after 30 years will have an annual premium of roughly Rs 12 lakh — or Rs 1 lakh per month.
Increasing the investment
When Amlani used the calculator, his monthly income was around Rs 85,000 and he needed to invest almost 20% of this for his retirement. A year later, his income has gone up and so have expectations. The calculator now says he needs to save over Rs 10 crore in the next 27 years, but Amlani is not worried. If he continues putting money in his PF, PPF and equity funds as planned, it won’t be difficult for him to reach the target.
All Amlani has to do is increase the quantum of investment every year. If a 30-year-old with a monthly salary of Rs 50,000 starts saving 10% (Rs 5,000) for his retirement every month in an option that earns 9% per year, he will accumulate Rs 92 lakh by the time he is 60. But if he raises his investment by 10% every year (in line with assumed increase in income), he would have saved Rs 2.76 crore.
It’s surprising that not many investors follow this simple strategy even though their income rises every year.Sure, the annual increment in salary is nullified to some extent by the increase in cost of living. Yet, even when there is a marked increase in investible surplus, people don’t match investments with the increase in income. The silver lining is that contributions to the Provident Fund are linked to income and automatically increase after every annual increment.
The right investment mix
We looked at three types of investors: risk-averse individuals who stay away from equities, moderate investors who have some exposure to stocks and aggressive investors who are willing to take risks. Each starts with a monthly investment of Rs 15,000 spread across different retirement saving options, and increases the investment amount by 10% every year. Unfortunately for the risk-averse investor, his nest egg is considerably smaller than those of the moderate and aggressive investors.
This is because apart from PF and investments in small savings schemes, he has invested in low-yield life insurance policies and pension plans. Life insurance policies offer assured returns and a tax-free corpus. But the returns are very low–even a long-term plan of 25-30 years will not be able to generate more than 6-7%. Pension plans from life insurance companies are also high-cost instruments. While this shows that equity investments are critical for a long-term goal, the other two haven’t taken too much risk either.
The equity exposure of the moderate investor does not exceed 53% while the aggressive investor has a marginally higher allocation to stocks. The moderate investor comes close to the Rs 10-crore mark, while the aggressive investor manages to reach the nine digit figure.
Investing discipline needed
The big problem, however, is the lack of investing discipline. Though our calculations do not allocate too much to equity, we have assumed regular investments for 30 years. In reality, data from AMFI shows small investors withdraw 47% of investments in equity funds and 54% of investments in non-equity funds within two years. In fact, 27% of equity fund investments are withdrawn within a year. “Small investors just don’t have the patience or the long-term vision required to make money from equity investments,” says a senior fund manager. It’s futile to imagine a nest egg of Rs 10 crore if your investment term is only 1-2 years.
The trajectory of equity investments is never a straight line. It will have ups and down, which is an inherent feature of this asset class. However, in the long-term, these investments will prove more rewarding than fixed income options. Although equity funds have churned out much higher returns in the past 15 years, we have assumed a conservative 12% returns from equity investments.
Source : http://goo.gl/qYLTb0
PF withdrawal norms dropped: There could be good reasons to keep your money with the EPFO unless you need it for a specific purpose and you have no alternative sources to meet those expenses.
By: Sarbajeet K Sen | Updated: April 20, 2016 5:25 PM | Indian Express
Employee Provident Fund members may have won the battle against the government’s move to impose restrictions on EPF withdrawal, but should they rush to take out the money if eligible to do so?
There could be good reasons to keep your money with the fund unless you need it for a specific purpose and you have no alternative sources to meet those expenses.
Here are a few reasons why you should consider staying invested in with the Employee’s Provident Fund Organisation (EPFO).
Provides old-age income security: The main purpose of contributions to EPF is to create a corpus for the golden years of the members. The corpus created through compulsory savings should be looked at as a fund that would provide financial security at old age. It should not be withdrawn unless for specified emergency purposes. Besides, there is provision for pension and insurance under EPFO.
High rate of interest: EPFO has set the interest rate for 2015-16 at 8.8 per cent, which makes it one of the most lucrative fixed-income savings instruments. This is even better than Public Provident Fund (PPF) which now gives an annual interest of 8.1 per cent. Hence, financial advisors often suggest voluntary increase in EPF contributions from the employee side beyond the mandatory 12 per cent of basic.
Compounding for more years builds large corpus: With the money being compounded at a healthy interest rate the fund can help generate a corpus at retirement can be substantial. A quick calculation shows that an average monthly contribution of Rs 5000 for 30 years at 8.8 per ent compounded annually will create a corpus of Rs 82.35 lakhs after 30 years. However, if the same it withdrawn after 25 years, you will get around Rs 54 lakhs and over 20 years the corpus will be substantially lower at Rs 32 lakhs.
Provides tax-free returns: EPF enjoys Exempt, Exempt, Exempt (EEE) status and hence it is not taxed throughout its life including contribution, accumulation and withdrawal. If tax-saving is factored in, the 8.8 per cent interest rate works out effectively to nearly 12.5 per cent interest if you are in the 30 per cent tax bracket. However, if you withdraw the corpus before completing five years as member and the amount is over Rs 30,000, you will have to pay tax as per your income slab.
Interest paid even in dormant accounts: The government has recently taken a decision to resume paying interest on ‘dormant’ EPF accounts. Earlier, if your money with EPFO had no contributions for over 36 months it was being categorized as ‘dormant’ and no interest was paid on it. That was a good reason to withdraw the money and invest it to other productive avenues. Not any longer. You can now retain the accumulation and earn healthy interest till retirement.
Source : http://goo.gl/mKmSU7
Don’t tinker with your long-term investment plan. But it is always better to make some critical changes, based on new tax laws and instruments
Sanjay Kumar Singh | April 3, 2016 Last Updated at 22:10 IST | Business Standard
The start of a new financial year is a good time to review your financial plan and take stock of where you stand in relation to your goals. If new goals have emerged, this is the time to make fresh investments for these. While having a steady approach is a virtue here, make some adjustments in the light of developments that have occurred over the past year.
Large-cap funds have fared worse than mid-cap and small-cap ones over the past one year (see table). Over this period at least, the conventional wisdom that large-cap funds tend to be more resilient than mid-cap and small-cap ones in a declining market was overturned. Nilesh Shah, managing director, Kotak Mahindra AMC, offers three reasons. “For the bulk of the previous year, FIIs were sellers of large-cap stocks, whereas domestic institutional investors (DIIs) were buyers of mid- and small-caps. Large-cap stocks are also more linked to global sectors like metal and oil, whereas mid- and small-caps are linked to domestic sectors. The latter has done better than the former, leading to stronger performance by mid- and small-cap stocks. Large-cap stocks’ earning growth decelerated or remained subdued throughout last year while mid- and small-caps delivered better growth,” he says.
Despite last year’s anomalous performance, investors should continue to have the bulk of their core portfolio, 70-75 per cent, in large-cap funds for stability, and only 20-25 per cent in mid-cap and small-cap funds. Large-caps could also fare better in the near future. Says Ashish Shankar, head of investment advisory, Motilal Oswal Private Wealth Management: “IT, pharma and private banks, whose earnings have been growing, will continue to do so. Public sector banks and commodity companies, whose earnings have been bleeding, will not bleed as much. Many might even turn profitable. FII flows turned positive this month and FIIs prefer large-caps. With the US Fed saying it won’t hike interest rates aggressively, global liquidity should improve. If FII flows continue to be stable, large-caps should do better.” Valuations of large-caps are also more attractive.
Among debt funds, the category average return of income funds and dynamic bond funds was lower than that of short-term, ultra short-term and liquid funds (see table). Explains Shah: “Last year, while Reserve Bank of India (RBI) cut policy rates, market yields didn’t soften as much. The yield curve became steeper. The short end of the curve came down more than the long end, which is why shorter-term bonds did better than longer-term gilts.”
Stick to funds that invest in high-quality debt paper, in view of the worsening credit environment. Shankar suggests investing in triple ‘A’ corporate bond funds. “Today, you can build a triple ‘A’ corporate bond portfolio with an expected return of 8.5 per cent. Many of these have expense ratios of 40-50 basis points, so you can expect annual return of around eight per cent. If bond yields come down, you could end up with returns of 8.5-9 per cent. If you redeem in April 2019, you will get three indexation benefits, lowering the tax incidence considerably.” Investors who have invested in dynamic bond funds should hold on to these. “A rate cut is expected in April. Yields will drop and there may be a rally in the bond market,” says Arvind Rao, Certified Financial Planner (CFP), Arvind Rao Associates.
CHANGES YOU NEED TO MAKE
- Fixed deposit rates from banks will be better than returns from the post office deposits in the new financial year
- Choose your tenure first and then, do a comparison of bank fixed deposit rates before making the final choice
- Invest in the yellow metal via gold bonds
- If your liabilities have increased, revise term cover upward
- Revise health cover every three-five years to deal with medical and lifestyle inflation
- Revise sum assured on home insurance if you have added to household assets
- Conservative investors should invest in PPF at the earliest
- Those who can take some risk should bet on ELSS funds via SIP
- Invest Rs 50,000 in NPS
Traditional fixed income
The recent cut in small savings has jolted conservative investors. The rates on these have been linked to the average 10-year bond yield for the past three months. These will be revised every quarter now, make them more volatile. “People who want to invest in debt and want sovereign security should continue to invest in Public Provident Fund (PPF). No other instrument gives a tax-free return of 8.1 per cent with government security,” says Rao.
As for time deposits, financial planner Arnav Pandya suggests, “From April, fixed deposits of banks will give better returns than those of the post office. Decide on your investment tenure, see which bank is offering the best rate for that tenure, and invest in its deposit.” Lock into current rates fast, as even banks are expected to cut their deposit rates.
Tax-free bonds are another good option. Nabard’s recent issue carried a coupon of 7.29 per cent for 10 years and 7.64 per cent for 15 years. Beside getting tax-free income, investors stand to get the benefit of capital appreciation if interest rates are cut.
“People who have some risk appetite may also look at debt mutual funds and fixed deposits of stable companies,” adds Rao.
The sharp run-up in gold prices over three months, owing to the rise in risk aversion globally, took most people by surprise. The sudden spurt emphasises the need to stay diversified and have a 10 per cent allocation to the yellow metal in your portfolio. However, instead of using gold Exchange-traded funds (ETFs), which carry an expense ratio of 0.75-1 per cent, invest via gold bonds, which offer an annual interest rate of 2.75 per cent. The Budget made gold bonds more attractive by exempting these from capital gains tax at redemption.
Start investing in tax-saving instruments from the beginning of the year. “Don’t leave tax planning for the end of the year, otherwise you may have to scramble for funds,” says financial planner Ankur Kapur of ankurkapur.in. For those with the money, Pandya suggests: “Invest the entire amount you need to in PPF before the April 5. That will take care of tax planning for the year and you will also earn interest on your investment.”
Investors with a higher risk appetite could start a Systematic Investment Plan (SIP) in an Equity Linked Savings Schemes (ELSS) fund, which can give higher returns. “If you invest early in the year via an SIP, you will reap the benefit of rupee cost averaging,” says Dinesh Rohira, founder and Chief Executive Officer, 5nance.com. Pankaj Mathpal, MD, Optima Money Managers suggests linking all tax-related investments to financial goals.
If you live in your parents’ house and pay rent to them to claim House Rent Allowance benefits, which is perfectly legal, get a rent agreement prepared.
With 40 per cent of the National Pension System (NPS) corpus having been made tax-free at withdrawal in this Budget (the entire corpus was taxed earlier), this has become more attractive. “Open an NPS account if you have not done so already and enjoy the additional tax deduction of Rs 50,000,” says Anil Rego, CEO & founder, Right Horizons. In view of the low returns from annuities, into which 60 per cent of the final corpus must be compulsorily invested, don’t invest more than Rs 50,000.
Tax deduction under Section 24 is available on the interest repaid on a home loan. “Buying a property to avail of the benefit is not advisable if the family has a primary residence,” says Rego.
While reviewing your financial plan, check if the term cover is adequate. A family’s insurance cover should be able to replace the breadwinner’s income stream. Financial planners take into account household expenses, goals like children’s education and marriage, and liabilities like home loans when deciding on a person’s insurance requirement. “If goals have changed or liabilities have increased, raise the amount of cover,” suggests Mathpal. Kapur says the premium rate is likely to be lower if you buy the term plan before your birthday.
Your health insurance cover might also need to be raised to take care of medical inflation. The same holds true for household insurance if you have reconstructed your house and the structure has become more expensive, or if you have added expensive assets. Rohira suggests buying add-on covers like accidental insurance and critical health insurance for comprehensive protection.
Bindisha Sarang | Apr 4, 2016 10:49 IST | First Post
Public Provident Fund (PPF) gives you tax free returns of 8.1%. But, did you know the returns can be more from your PPF account if invested at the right time? Read on.
PPF account allows you to invest Rs 1.5 lakh ever year. And, thanks to Sec 80 C, the returns are tax free. While the interest on the PPF account balance is compounded annually, the interest calculation, however, is done every month. The interest is calculated on the lowest balance in your account between 5th and the last day of the month.
What does this mean? Simply put, if you deposit the amount after 5th, you miss earning interest for that particular month.
So, the smart thing to do is to make the most of your PPF account by putting money on or before the 5th of every month.
Even better, in case you have idle money at your disposal, a single deposit of Rs 1.5 lakh can be put into your PPF account before 5 April, right at the start of the new financial year, to earn interest for the whole year.
But if you don’t have that kind of lump sum money, make sure you make a a monthly investment before the 5th of every month. Of course, the minimum you can invest in PPF is Rs 500 a month.
Source : http://goo.gl/R8Gmoy
TNN | Mar 19, 2016, 02.46 AM IST | Times of India
NEW DELHI: The government on Friday announced a steep cut in interest rates on small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and Kisan Vikas Patras – which will fetch up to 90 basis points lower returns during the April-June quarter.
On January 14, TOI first reported that the government could reduce interest rates on small saving schemes but the extent of the reduction has taken everyone by surprise.
In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points (100 basis points equal a percentage point) is among the sharpest in nearly 15 years. Although the rates are to be reviewed every three months, if they remain unchanged during the next financial year, someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 in 2016-17.
But the announcement has not gone down well with the middle class. Angry protests have begun on social media with PPF trending on Twitter. The government, however, claimed the changes were linked to the market rate, offering a parallel to global oil prices.
A reduction in rates on small savings is also bad news for those with large balance in fixed deposits, especially senior citizens, as banks are now expected to follow government action with similar cuts.
For long, banks and RBI had urged the government to reduce small savings rates to ensure that banks cut deposit rates. This, in turn, will pave the way for lower lending rates and translate into lower EMIs in the coming months, should the banks decide to pass on the benefit. However, given that a two-three year fixed deposit (FD) with SBI fetches the highest rate of 7.5% a year, savings in PPF still remain more attractive, especially with tax benefits thrown in.
Though pressure had been building for several months, the government opted for a change from April, which is the annual date for reset. “It’s normal practice for the last few years to change interest rates from April and we have followed that. The rates are linked to the yield on government securities and we have followed the same practice with a mark up for senior citizens, Sukanya Samridhi Scheme, PPF and NSC,” economic affairs secretary Shaktikanta Das told reporters.
The government provides an annual spread of a percentage point on Senior Citizen Savings Scheme, 75 basis points (bps) on Sukanya Samridhi Scheme and 25 bps on PPF, NSC, five-year post office deposit and Monthly Income Scheme. But post office savings deposits of one-three years, KVP and fiveyear Recurring Deposits will not longer get the benefit of a higher spread.
Das said the average yield on government bonds had come down from 8.5% in 2014-15 to 7.9% during the current financial year. “It (reduction) is being done to make the rates more market aligned. This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates,” he told reporters but added that banks had to take a call on rates.
A sharp reduction in small savings rates have always been a ticklish issue politically with Yashwant Sinha facing severe criticism when he cut rates as finance minister in the Atal Bihari Vajpayee government.
Source : http://goo.gl/hBTO11
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
Revenue Secretary Hasmukh Adhia said the Budget proposal to tax 60 per cent of employee provident fund (EPF) withdrawal will affect less than one-fifth of employees with high salaries.
By: PTI | New Delhi | Updated: Mar 1, 2016, 14:11 | Indian Express
Seeking to dispel fears of the salaried class, the government today said PPF will not be taxed on withdrawal and only the interest that accrues on contributions to employee provident fund made after April 1 will be taxed while principal will continue to be tax exempt.
In an interview to PTI, Revenue Secretary Hasmukh Adhia said the Budget proposal to tax 60 per cent of employee provident fund (EPF) withdrawal will affect less than one-fifth of employees with high salaries.
The proposal, he said, is to tax the interest accrued on PF contributions made after April 1, 2016. “The principal amount will not be taxed and will continue to remain tax exempt on withdrawal. What we have said is 40 per cent of the interest accrued on contributions made after April 1 will be tax exempt and its remaining 60 per cent will be taxed.”
Source : http://goo.gl/NPl6WJ
By Deepshikha Sikarwar, ET Bureau | 23 Jan, 2016, 10.31AM IST | Economic Times
NEW DELHI: Interest rates on popular small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and the Kisan Vikas Patra could soon be reset every quarter as part of the government’s plan to peg them closer to market rates to reduce market distortions and help the cause of lower interest rates.
The government will also reduce the mark-up over the benchmark government bond rate for such schemes of small maturities to nudge short term rates lower.
High interest rates on small savings schemes have long been cited as a structural barrier to interest rates coming down as they compete with bank deposits, but are not subject to the same kind of market pressures as them. Because they stay high, bank deposit rates are forced to remain high and therefore prevent lending rates from coming down.
A senior government official said the first reset under the new rules will happen from April 1 this year and rates are expected to fall. A notification will be issued soon, this official said, adding that interest rates on schemes for senior citizens and a scheme for girl children were not likely to be revised.
Small savings’ interest rates are linked to yields on government bonds of comparable tenure, but unlike gilts that are traded daily and see yields change, these change only sparingly.. The last revision in rates on these schemes was on April 1last year. Since then, market rates have moved south following a 0.75 percentage point policy rate cut by the Reserve Bank of India, creating a wide wedge between what the banks can offer and what is available on small savings.
State Bank of India, for example, offers 7 per cent on deposits of maturity of five years or more. Deposits of such tenure fetch 8.5 per cent in a post office small savings account. The PPF rate for a similar maturity is 8.7 per cent. This wide gap between small savings’ and market rates impacts deposit mobilisation by banks as their ability to reduce deposit rates is adversely impacted. This impacts banks’ ability to lower lending rates as well.
A quarterly reset of small savings rate will ensure that distortion in the rates caused by the small savings is kept to a minimum, officials said. The weighted average yield of dated government securities was 7.9 per cent in April-September 2015 compared with 8.81 per cent in the first half of the preceding year, potentially opening up the possibility of an up to one percentage point reduction in the small savings rate.
In their pre-budget meeting with Finance Minister Arun Jaitley earlier this month, banks and financial institutions had also suggested quarterly benchmarking of rates.
Source : http://goo.gl/LBLfSt
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 Sanjeev Sinha | 7 Jul, 2015, 12.38PM IST | ECONOMICTIMES.COM
Markets in 2014-2015 have been rife with fluctuations. The run up to the elections and its aftermath were great for the stock market. There was new optimism about the economy, industry, and business. Oil prices went down and inflation subsided.
A year later, there are prospects of less than normal monsoon, a world economy belabouring its way to marginal growth, and industrial production showing sluggish to incrementally better performance month by month. Markets too have reacted similarly and have gone down by around 6% from their record high hit in March. In such a situation, investors tend to get confused about how and where to invest. In this article, we will look at 6 avenues of investment that can still give you good returns. Here they go:
1. Equity mutual funds (especially comprising blue chip companies)
Though the market has gone down, there is not much downside in blue chip companies and mutual funds comprising of these companies. The government is clear about manufacturing and is providing faster clearances for factories to be set up, production to start, and energy to be given to the industry.
“This may take a few months to operationalize, but the trend is clear. The projects that were in limbo for the last couple of years have started getting approved. This will create significant momentum and wealth for large firms and their investors. Blue chip equity funds are offered by HDFC Mutual Fund, Birla Sun Life, Reliance and many more,” says Adhil Shetty, founder & CEO of BankBazaar.com.
2. Balanced fund (funds made up of equity and debt)
Many investors are not comfortable with pure equity funds because of high risk associated with the fund. Hence, they look for an avenue that is less risky and also takes advantage of market movements partially. Balanced fund is a good choice for such investors.
“Balanced funds invest a part in equity and a part in debt. The equity part moves up and down as per the market and the companies they represent, while the debt part is relatively consistent in returns. The overall return is determined by the weighted average return of equity part and debt part,” informs Shetty.
3. EPF (Employee Provident Fund) and PPF (Public Provident Fund)
EPF and PPF are risk-free investments offering returns of about 9%. There are many advantages of investing in EPF and PPF. They are risk free because they are backed by the Government of India. Moreover, the interest earned is also tax free. You can also save taxes on PPF and EPF investment, subjected to the limit of Rs 1.5 lakh under 80C.
Generally, EPF is done by your employer, and you and your employer both pay equal amount towards your EPF account.
Apart from the post office, PPF account can now be opened in any bank. Walk down to the nearest branch of BoI, Bank of Baroda, ICICI Bank or any other bank to open your PPF account. The maximum amount that can be invested in PPF in a year is Rs 1,50,000. This can be done in a maximum of 12 deposits in a year, and not necessarily each month. The minimum amount required is Rs 500. PPF has a tenure of 15 years, though you can withdraw it before 15 years, subject to certain conditions.
According to financial experts, conservative investors can still bank on EPF for creating their retirement corpus, but for investors with low or moderate risk profile and limited or no other retirement benefits, PPF currently appears to be the best option as returns are to a large extent guaranteed and the withdrawals after the mandatory holding period are tax-free.
4. Bonds offered by the Government and Corporates
Bonds are another avenue that is risk free. The bonds offered by the government are risk free because the government usually doesn’t default on the payment. If everything fails, they can always print new notes and pay the bond holder (at the cost of inflation though).
As far as corporate bonds are concerned, bonds offered by large firms with sound business models are preferable. There is a small risk in corporate bonds in case the company goes bankrupt. However, bonds by Tata, Mahindra, Reliance, L&T etc. are almost risk free.
“The best way to identify a good bond offering is to look at the rating. All the bonds offerings have to go through a mandatory rating by a rating agency. The rating agency decides the rating based on the company’s ability to honour its obligations to bondholders, i.e. whether it can pay the interest and principal on time. A high rating is an indication that the risk is low,” says Shetty.
5. Real Estate
For the last couple of years, the real estate sector has disappointed investors. The market is not showing any discernible trend in this sector. Additionally, the real estate sector is mired in many controversies, corruption, and injurious practices. However, the main contributing reason for the prevailing widespread scepticism was low economic growth and even lower expectation of future growth.
However, with the new government focused on economic growth, the real estate sector will bounce with the first hint of an uptick in growth. Moreover, projects such as smart cities will provide ample opportunities to investors in the real estate sector. But investors should be careful of a few companies which are embroiled in controversies and legal battles with the government and consumers.
6. Foreign or overseas mutual fund
This is another area that investors usually don’t consider due to minimal or zero awareness about foreign companies and markets. However, many mutual fund companies such as DSP Black Rock, Franklin Templeton and others offer mutual funds focused on foreign countries.
These funds invest in many countries based on the nature of the fund. For example, an emerging market fund may invest in China, Indonesia, Vietnam and Brazil, while a fund focused on oil exploration may invest in US shale oil companies, Saudi oil field companies, among others.
A brief overview of returns offered by the above-mentioned entities:
Important points to consider
While investing is important, assessing your investment periodically is vital for your wealth. Even if you don’t check stock prices or mutual fund NAVs every week or every month, it is vital to take a comprehensive look at all your investments every 6 months or a year. During such assessments, it is important to avoid impulsive decisions to sell or buy. The purpose of assessing your investment is to find new avenues of investment and discard an existing one if things have gone bad.
“You also need to know a few key parameters of any asset that you want to invest in. For example, if you are considering a particular mutual fund, look for annualized returns for the last 5 – 10 years instead of just the previous year’s returns. Look for the expense ratio, which is the percentage of investment charged to you. Look for sectors and companies where the mutual fund is investing. All these data is available on any of the numerous financial websites that give out such information,” says the CEO of BankBazaar.com.
Finally, don’t wait for the right time. The most important thing in investing is to start it, no matter how small your investment is. Begin with a small amount and grow the investment, thereby gaining in experience about the markets.
NDTV Profit | Updated On: March 30, 2015 17:18 (IST)
Public provident fund (PPF) is among the most popular investment options for long-term savings. Deposits made under PPF also qualify for tax benefits. PPF subscribers can also avail loan benefits against their deposits.
10 Things to Know About the Loan Facility
1) A PPF subscriber can avail loan between the third and sixth financial year of opening the account. For example, if the account was opened in the 2011-12, a subscriber can take a loan between 2014-15 and 2017-18. PPF accounts follow an April-March year cycle.
2) The amount is restricted to 25 per cent of the balance at the end of the second year preceding the year in which the loan is applied for. For example, if the loan was applied in 2015-16, 25 per cent of the account balance at the end of 2013-14 can be taken as loan.
3) However, no loan can be taken from the seventh year of opening the PPF account, as it qualifies for partial withdrawal.
4) The loan (principal) is repayable either in lump sum or in installments within 36 months.
5) The interest portion of the loan has to be repaid by two monthly installments after the principal is paid off.
6) Interest is charged at 2 per cent more than a subscriber receives on the PPF.
7) Meanwhile, the balance amount in the PPF account accumulates interest.
8) If the loan is not repaid within 36 months, interest at 6 per cent more than what subscribers receive on their deposits is charged.
9) The interest on outstanding loan which has not been paid before 36 months or paid partly will be debited from the subscriber’s account at the end of each financial year.
10) A second loan can be taken on full payment of first loan.
Disclaimer: “Investors are advised to make their own assessment before acting on the information.”
Source : http://goo.gl/CW18a2
Sanket Dhanorkar | Dec 29, 2014, 06.10AM IST | Times of India
Borrowers typically have horror stories to tell about loan tenures that have been extended till retirement, credit cards charging astronomical amounts and harassment by lenders due to missed EMIs. If you also find it difficult to repay your loans, here are some strategies that can help you manage your debt situation without stressing your wallet.
Repay high interest loans first
As a first step, make a list of all outstanding loans and then identify the ones that need to be tackled first. Ideally, start by repaying the costliest loan, such as credit cards and personal loans. Pay the maximum amount you can afford against the high-cost loan without jeopardising the repayment of the other loans. Once you have cleared the costly debt, move to the next one. Also known as the ‘debt avalanche’, this strategy minimises the total interest paid on all loans. But this repayment should not be at the cost of the regular EMIs on other loans. Those must continue as well.
While prioritising repayments, also consider the tax benefits on some loans. For instance, the interest paid on an education loan is fully tax deductible. If you factor in the tax benefits in the 30% tax slab, an education loan that charges 12% effectively costs 8.5%. Similarly, tax benefits bring down the actual cost of a home loan.
Increase repayments with rise in income
One simple way to repay your loans faster is to bump up the EMI with every rise in your income. Assuming that a borrower gets an 8% raise, he can easily increase his EMIs by 5%. The EMI for a 20-year home loan of `20 lakh at 11% rate of interest comes to `20,644. The borrower should increase it by around `1,000 every year. Don’t underestimate the impact of this modest increase. Even a 5% increase in EMI ends the 20-year loan in just 12 years (see table). It helps the borrower save almost `12 lakh in interest.
|Repay more as income rises|
|Even a small 5% increase in the EMI every year can reduce the home loan tenure by about 8 years|
|Amount : 20lacs||Term : 20 years||Rate : 11%|
|Year||EMI (Rs)||Remaining Tenure|
|1||20644||20 years||The borrower can reduce his tenure by 8 years vy increasing the EMI by 5% per year|
|2||21676||16 years 5 months|
|3||22760||12 years 11 months|
|4||23898||10 years 10 months||If the EMI is increased by 10% the tenure will be reduced by 10 years|
|6||26347||7 years 5 months|
|7||27665||6 years||Even a minute 2% increase in EMI can reduce tenure by nearly 5 years|
|8||29048||4 years 8 months|
|9||30500||3 years 6 months|
|10||32025||2 years 4 months||If the home loan interest rates come down then the reduction in tenure will be much more|
|11||33627||1 year 3 months|
Use windfall gains to repay costly debt
Received a fat bonus? Do not splurge on the lastest smart phone or newest plasma TV. Use the money to pay down your debt aggressively. Windfall gains, such as income tax refunds, maturity proceeds from life insurance policies and bonds, should be used to pay costly loans like credit card debt or personal loans. However, the lender may levy a prepayment penalty of up to 2% of the outstanding loan amount. While the RBI does not allow banks to levy a prepayment penalty on housing loans with floating rate interest, many banks do so for fixed rate home loans. Lending institutions normally do not charge any prepayment penalty if the amount paid does not exceed 25% of the outstanding loan at the beginning of the year.
Convert card dues to EMIs
Credit cards are convenient and give you interes- free credit for up to 50 days. However, they can also burn a hole in your wallet if you are a reckless spender. If you regularly roll over the credit card dues, you shell out 3-3.6% interest on the outstanding balance. In a year, this adds up to a hefty 36-44%. If you have run up a huge credit card bill and are unable to pay it at one go, ask the credit card company to convert your dues into EMIs. Most companies are willing to let customers pay down large balances in 6-12 EMIs. If the sum is big, they may even extend it to 24 months. However, if you miss even a single EMI, the rate will increase to the regular rate of interest your credit card charges. You can also take a personal loan. These are costly but will still be cheaper than the 36-44% you pay on the credit card rollover.
Use investments to repay debt
If your debt situation becomes bad, you can use your existing investments to make it better. You can borrow against your life insurance policy or from the PPF to pay off your loans. The PPF allows the investor to take a loan against the balance from the third financial year of investment, and the same is to be repaid within three years. The maximum loan one can take is up to 25% of the balance at the end of the previous year. The rate of interest charged on the loan is 2% more than the prevailing PPF interest rate. However, one should withdraw from one’s PPF or Provident Fund accounts to pay off debts only in extreme situations. These are long-term investments which should ideally be kept untouched to ensure that compounding works its magic.
Consolidate or refinance
If you have multiple loans, consider taking a secured loan against an asset to repay them. Loans taken against property are much cheaper and can replace costly loans. You can choose a tenure that is comfortable and an EMI that is affordable. Interest rates are likely to change soon. Keep track of what is the going rate in the home loan market. If you can get a better rate, have your loan refinanced. This will involve a one-time cost, which is typically around 1-2% of the outstanding loan, with a cap ranging between `25,000 and `50,000 depending on the bank. The gain from this refinancing should be higher compared to the charges you pay. As a rule, if the prevailing rate of interest payable on your home loan is 1% more than the interest rate on offer in the market, you should consider refinancing your home loan. Beware of loan agents asking you to shift your floating rate loan to a fixed rate one at this point. With rates expected to climb down, you may lose out if you switch to a fixed rate loan at this stage.
Make lifestyle changes
It is often the little things that go a long way in keeping your finances in fine fettle. While so far we have discussed different ways in which you could reduce your loan burden, you may also need to make some lifestyle adjustments to accommodate your loan repayments and ensure you have enough money to pay higher EMIs. A lifestyle change is needed until all debts are repaid. This means cutting down on luxuries and unwanted spending. Go slow on movie shows, dining out and weekend getaways. Keep the credit card locked up when you go to the mall and try to make purchases with cash.
In extreme cases, you could also get your credit card company to lower your spending limit. Most importantly, cut down on taking fresh loans unless these are taken to prepay existing, costlier loans. Automatically debit your repayment dues to your bank account. In this way, you eliminate the possibility of missing the payment by mistake. Remember, paying after the due date attracts late fee and impacts your credit score negatively.
Lastly, do not feel shy to cry out for help. If you are unable to figure out a way out of your debt hole, approach a debt counselling centre, which offer free advice. These are actively engaged in helping borrowers facing problems with their loans.
Source : http://goo.gl/8hB0ez
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
The PF can be an important pillar in a retirement plan, but one needs to make additional investments to build a corpus big enough to sustain one’s expenses for 20-odd years after retiring.
Preeti Kulkarni, TNN | Nov 24, 2014, 07.10AM IST | Times of India
If you dream about a comfortable retirement but are planning to depend solely on your Provident Fund (PF) to meet your needs, be ready for a shock. The PF can be an important pillar in a retirement plan, but the corpus of the average subscriber is likely to fall woefully short of his requirement.One needs to make additional investments to build a corpus big enough to sustain one’s expenses for 20-odd years after retiring.
To be fair, the Provident Fund’s design makes it the most effective way to save for retirement. You start contributing from the very month you start earning, and since it is a compulsory saving, you can’t avoid it. Besides, your contribution is linked to your income and rises with every increment in your salary. If a person takes up a job at the age of 25, even a modest contribution of Rs 5,000 a month and a matching contribution by his employer can build up a massive corpus of Rs 6.89 crore over 35 years. This calculation assumes that his income (and, therefore, the contribution) will rise by 8% every year and the PF will give 8.5% returns.
While the figure of Rs 6.89 crore may appear huge, it may not be enough. If you need Rs 50,000 a month for living expenses today, a 7% inflation would push up the requirement to roughly Rs 5.34 lakh a month in 35 years. When you are 60, you would need a corpus of Rs.10.52 crore to sustain inflation-adjusted withdrawals for the next 20 years. Assuming a post-tax return of 8.5% and 7% inflation, the Rs 6.89 crore from the PF would be completely wiped out in a little over 12 years. This could mean having no money in your retirement account at the age of 72.
There’s another problem. To make your PF work for you, you must remain invested for the long term. However, a lot of people withdraw their PF when they change jobs, thus losing out on the power of compounding. “In India, the PF is often used for other purposes, particularly when people change jobs. They end up withdrawing this accumulated corpus to buy expensive gadgets or go on a holiday, forgetting that the purpose was retirement planning,” says Arvind Usretay, India Retirement Business Leader, Mercer. A recent global survey by Mercer has ranked India’s retirement system the lowest among the 25 countries surveyed.”What continues to hold India back is the lack of retirement coverage for the informal sector and less than adequate retirement income expected to be generated from contributions made to the Employees’ Provident Fund (EPF) and gratuity benefits,” notes the Mercer study.
Another global study by Towers Watson points out that a significant majority of employees sees their employer retirement plans as the most important source of income in retirement. “Employers must educate their employees on the need for retirement planning and provide them the tools to help them save adequately,” says Anuradha Sriram, director, benefits, Towers Watson, India.
To ensure a comfortable life in retirement, one needs to make additional investments to build a corpus big enough to sustain one’s expenses for nearly 20 years in retirement. Here are a few options you can consider.
Mutual funds are, perhaps, the best way to supplement your retirement savings.Among these, equity mutual funds have the potential to give very high returns, but also carry high risk. They are best suited to younger investors who can withstand short-term volatility to earn long-term gains. “Equity funds should be the instrument of choice for young investors who have 25-30 years to build a retirement kitty,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories. An additional advantage of investing in equity funds is that the gains are tax-free.
If you are averse to taking risks, consider a balanced fund, where the eq uity exposure is lower. Ultra cautious investors can go for MIPs of mutual funds that invest only 15-20% of their corpus in stocks and put the rest in bonds. However, the returns of MIPs will not be able to match those of equity and balanced funds.
Ulips have earned a bad name because of the rampant mis-selling in the past.However, this much reviled product can be a good option for retirement planning.In recent months, insurance companies have come out with online plans that levy very low charges. The Click2Protect plan from HDFC Life charges an annual fund management fee of 1.35%, which is less than the direct mutual fund charges. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn’t have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don’t have lower charges but compensate long-term investors with ‘loyalty additions’. The best part in a Ulip is that one can shift money from debt to equity, and vice versa, without incurring any tax liability. The corpus is also taxfree on maturity.
Unit-linked pension plans
Unlike Ulips, unit-linked pension plans are not a very good option. Although they work like Ulips during the investment years, the rules at the time of maturity are different. You can withdraw only 33% of the corpus on maturity and the balance must compulsorily be used to buy an annuity . The pension from the annuity is fully taxable as income, so these plans are not tax-efficient. Besides, they have very high charges in the initial years, which eat into the returns of the investor.There is no online unit-linked pension plan on offer.
The New Pension Scheme offers greater flexibility to investors than the unit-linked pension plans from insurance companies. The charges are also very low. The investor can choose from six pension fund managers. He can also switch to another fund manager once in a year. The best part about the NPS is the lifestage fund. Under this, the asset allocation is linked to the age of the investor. The exposure to a volatile class like equity is progressively brought down as the person gets older. “It is a well-planned pension product and facilitates automatic lifecycle-based investment option, making it attractive even for those who may not be financially savvy ,” says Usretay. The drawback of this scheme is that the equity exposure is capped at 50%, and 40% of the corpus must mandatorily be put into an annuity to earn a pension. As mentioned earlier, the pension income is fully taxable.
Traditional insurance policies
They offer tax-free income and insurance cover, but traditional insurance policies are not the best way to save for retirement.The returns are quite low at 6-7%, and the investor has very little flexibility . The PPF, which offers the same tax benefits, may seem like a better alternative. If the annual ceiling of Rs 1.5 lakh in the PPF is a problem, you can contribute more to your PF through the Voluntary Provident Fund.
Apart from making additional investments for retirement, you need to plan for emergencies as well. An unexpected event can derail your financial planning.”Build a contingency fund for financial emergencies and buy adequate life and health insurance,” says Sudipto Roy, managing director, Principal Retirement Advisors. The contingency fund should be big enough to take care of six months’ expenses.
Source : http://goo.gl/pClWsT
Preeti Kulkarni, ET Bureau Nov 10, 2014, 01.34PM IST | Economic Times
If you dream about a comfortable retirement but are planning to depend solely on your Provident Fund (PF) to meet your needs, be ready for a shock. The PF can be an important pillar in a retirement plan, but the corpus of the average subscriber is likely to fall woefully short of his requirement. One needs to make additional investments to build a corpus big enough to sustain one’s expenses for 20-odd years after retiring.
To be fair, the Provident Fund’s design makes it the most effective way to save for retirement. You start contributing from the very month you start earning, and since it is a compulsory saving, you can’t avoid it. Besides, your contribution is linked to your income and rises with every increment in your salary. If a person takes up a job at the age of 25, even a modest contribution of Rs 5,000 a month and a matching contribution by his employer can build up a massive corpus of Rs 6.89 crore over 35 years. This calculation assumes that his income (and, therefore, the contribution) will rise by 8% every year and the PF will give 8.5% returns.
While the figure of Rs 6.89 crore may appear huge, it may not be enough. If you need Rs 50,000 a month for living expenses today, a 7% inflation would push up the requirement to roughly Rs 5.34 lakh a month in 35 years. When you are 60, you would need a corpus of Rs 10.52 crore to sustain inflation-adjusted withdrawals for the next 20 years (see table). Assuming a post-tax return of 8.5% and 7% inflation, the Rs 6.89 crore from the PF would be completely wiped out in a little over 12 years. This could mean having no money in your retirement account at the age of 72.
There’s another problem. To make your PF work for you, you must remain invested for the long term. However, a lot of people withdraw their PF when they change jobs, thus losing out on the power of compounding. “In India, the PF is often used for other purposes, particularly when people change jobs. They end up withdrawing this accumulated corpus to buy expensive gadgets or go on a holiday, forgetting that the purpose was retirement planning,” says Arvind Usretay, India Retirement Business Leader, Mercer. A recent global survey by Mercer has ranked India’s retirement system the lowest among the 25 countries surveyed. “What continues to hold India back is the lack of retirement coverage for the informal sector and less than adequate retirement income expected to be generated from contributions made to the Employees’ Provident Fund (EPF) and gratuity benefits,” notes the Mercer study.
Another global study by Towers Watson points out that a significant majority of employees sees their employer retirement plans as the most important source of income in retirement. “Employers must educate their employees on the need for retirement planning and provide them the tools to help them save adequately,” says Anuradha Sriram, director, benefits, Towers Watson, India.
To ensure a comfortable life in retirement, one needs to make additional investments to build a corpus big enough to sustain one’s expenses for nearly 20 years in retirement. Here are a few options you can consider.
Mutual funds are, perhaps, the best way to supplement your retirement savings. Among these, equity mutual funds have the potential to give very high returns, but also carry high risk. They are best suited to younger investors who can withstand short-term volatility to earn long-term gains. “Equity funds should be the instrument of choice for young investors who have 25-30 years to build a retirement kitty,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories. An additional advantage of investing in equity funds is that the gains are tax-free.
If you are averse to taking risks, consider a balanced fund, where the equity exposure is lower. Ultra cautious investors can go for MIPs of mutual funds that invest only 15-20% of their corpus in stocks and put the rest in bonds. However, the returns of MIPs will not be able to match those of equity and balanced funds.
Ulips have earned a bad name because of the rampant misselling in the past. However, this much reviled product can be a good option for retirement planning. In recent months, insurance companies have come out with online plans that levy very low charges. The Click2Protect plan from HDFC Life charges an annual fund management fee of 1.35%, which is less than the direct mutual fund charges. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn’t have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don’t have lower charges but compensate long-term investors with ‘loyalty additions’. The best part in a Ulip is that one can shift money from debt to equity, and vice versa, without incurring any tax liability. The corpus is also taxfree on maturity.
Source : http://goo.gl/y5gCLT
Uma Shashikant, TNN | Oct 13, 2014, 07.11AM IST | Times of India
It is not easy to convince an investor that asset allocation is the best way to build long term wealth. It is really tough to tell even a dear friend that she should not seek out products, but take a more holistic view.There is simply no time to worry about these things, and as long as the product seems good, it should be fine. Whenever she calls, it is about investing some spare money. Sometimes, she provides me with a list of names and asks me to vet them for her. She is actually not interested in any conversation beyond this. Why should it matter?
There are no investors, at least none that I know of, who have all their money in a single product. Even those that buy property have some balance in the bank, their Provident Fund (PF), tax-saving funds and insurance policies, and some gold in the locker. Yes, that is asset allocation for you. Except that it is not to any specific design, but mostly built by default. How much you hold where will affect your financial lives the most–in terms of risk, return and all else that you care for. Investment products are but minor details in this big picture. What is wrong with asset allocation by default?
The assets that we hold should ideally match our needs, and we should know what we intend to do with them. This is the gist of the financial planning framework. Since all money is not earned and consumed today, and since tomorrow might hold needs that require funding, and since some of these needs would be much larger than our small monthly incomes, we all need financial planning. This activity can get as elaborate as you wish, or as simple as the allocation between assets that earn an income and assets that grow in value over time. Why is this distinction important?
Assets that provide an income stream are meant to serve short-term needs. They will typically feature low and steady return, mostly matching inflation rates, and preserve the invested capital. Assets that grow in value are meant to serve long-term needs. They will grow at a rate that beats inflation, but feature higher short-term risks to the invested capital. These are like batsmen and bowlers in a cricket team–and every team needs a combination of both to win. How tough is this to implement?
There are three broad combinations. An investor who primarily needs growth, should have 70% in growth assets and 30% in income assets.Investors, who have a steadily increasing income stream that takes care of most needs, should look at this combination. Investors who primarily need income should have 70% in income assets and 30% in growth assets. Retired investors are classic examples. Without the 30% in growth assets they will lose any edge to fight inflation. Those that are unable to decide one way or the other, or think they need both should do a 50:50 in income and growth assets.
My friend can use equity for growth and debt for income. An equity index fund and two diversified equity funds are more than enough.The index fund is her protection against selecting wrong funds and suffering as a consequence.The diversified equity funds provide the midcap, small-cap, sector stock and all such additional benefits. There is no need to buy one of each kind, assemble them all together and find that the return is about the same as a diversified equity fund. The safest income asset she can buy is debt issued by the government. The Public Provident Fund represents a fairly simple option with a good return. Its limitation is that it is not too liquid. The same is the case with PF. She can add some bank deposits to earn a bit more as interest, and two debt funds to earn any additional market income and enjoy some liquidity . One all-purpose debt fund called dynamic, flexible or any such name should serve her purpose. Any cash she has will be in the bank or in a liquid fund. That makes it five income products. But, my friend feels buying different products is nice, doing a few things over and over again is boring. Why is she wrong? The more the products she piles on, the higher the possibility that her return will be just about average. She now buys a different tax-saving fund each year. She obliges her advisor by buying a few New Fund Offers. Then she gets worried investing in the same thing and seeks new names when she has the money to invest. The end result is that she holds more than 15 different equity mutual funds. It is very likely that her return is just about the return on a broad equity market index, which she could have bought at a fraction of the cost she is paying for all the funds she holds. Investors fail to see how diversification works. If you hold too many choices, you are unlikely to benefit majorly from a good choice–or be hurt badly by a poor choice. You will stay at the average. So what should she do?
She should stick to an investment plan that assigns money to these options every year.There is no need to book profits, time the markets and sweat about what is going wrong. She has to do two things though. First, check, at least once a year, if the products she has chosen are still good. Second, switch from 70:30 to 50:50 and to 30:70 as her needs change. She can do this herself. If she finds that bothersome, she can ask her advisor to do it for her. Every investor’s core portfolio can be constructed in this manner. Rest is pure adventure!
Source : http://goo.gl/5HYbc6
Babar Zaidi | Sep 15, 2014, 06.27AM IST | Times of India
A recent survey by global professional services firm Towers Watson says that saving for retirement is a big concern for Indian employees, with 71% of the respondents worried that they are not saving enough. In another survey conducted by ET Wealth last year, respondents listed volatility of returns (32%), low savings rate (26%) and lack of reliable financial advice (25.4%) as their biggest retirement worry.
That’s surprising, because a majority of the respondents of both surveys were already investing in a product that takes care of all these concerns.The Employees’ Provident Fund (EPF) managed by the Employees’ Provident Fund Organisation (EPFO) ensures that an individual puts away enough for retirement every month. With 12% of his basic salary and a matching contribution by his employer, a subscriber to the EPF should be able to accumulate a decent amount by the time he retires. If someone started working at the age of 25 in April 2000 at a basic salary of `10,000 a month and got a raise of 10% every year, he would roughly have accumulated `16 lakh in his PF account by now. If the trend continues, he would have saved about `1.23 crore by the time he is 55 years old (see graphic) and more than `1.7 crore of tax-free money on retirement at 58.
Despite the tremendous opportunity, most contributors to the EPF won’t reach the `1 crore milestone. More than 13% of the respondents to the ET Wealth survey withdrew their PF balance each time they changed jobs. Withdrawing from the PF can be counter-productive on two counts. One, the withdrawn amount is usually blown away on discretionary expenses and retirement savings are back to square one. Two, if the individual withdraws his PF balance before completing five years, the amount becomes taxable.
Another 20% of the respondents to our survey said they dipped into the PF corpus for other needs.The EPFO allows an individual to withdraw from his PF account for specific needs, such as constructing or buying a house, children’s education and marriage or a medical emergency.
Should EPF invest in stocks?
The other concern about volatility of returns is also not an issue with the PF. The EPF invests in debt instruments that deliver stable returns. EPFO rules allow the EPF to invest up to 15% of its corpus in stocks but the Central Board of Trustees has steadfastly ignored suggestions to this effect.
Many financial experts, including Finance Ministry officials, have castigated the EPFO for this aversion to stocks. They say the EPF is a low-yield debt-based scheme that can never beat inflation.At a recent meeting of the EPFO, it was pointed out that the returns offered by the EPF since 2005, when adjusted to inflation during the period, were in the negative. The `100 put into the EPF in 2005, when marked to inflation, were worth only `97 now.Experts argue that the only way the EPF can beat inflation is by investing some portion of its gargantuan corpus in the stock markets. But while the inflow of fresh investments will be good for the equity markets, they may not have the same impact on investor returns. The New Pension System (NPS) funds for central government workers are allowed to invest up to 15% of their corpus in Nifty-based stocks in the same proportion as their weightage in the index. We looked at the SIP returns of these funds in the past 5-6 years and found that they were not significantly higher than what the 100% debt-based EPF has churned out. In fact, two of the funds have actually given lower returns. This despite the fact that these funds have invested right through the bear phase of 2008-9 and the markets are at all time high levels right now. Our calculations are not based on point-to-point returns but on SIP returns. We took into account the NAVs of the first reporting day of each month and then worked out the internal rate of return.
Don’t shun equities altogether
Having said that, we must add that a certain portion of your retirement savings should certainly be allocated to equities. It’s only that this equity exposure need not be through the EPF. Any retirement plan has to be a combination of several investments. Keep the EPF as the debt portion of your retirement plan and invest 5-20% in equities through a diversified fund.
Interestingly, though the pension fund managers of these NPS funds can invest up to 15% of the corpus in equities, they have allocated less than 8% to stocks. “Pension fund managers have been conservative because markets have been volatile.The negative impact of equity is magnified in the short term so they have shied away from maxing the equity exposure to 15%,” says Manoj Nagpal, CEO of Mumbai-based wealth management firm Outlook Asia Capital.
Compulsory and linked
The third concern about the lack of reliable advice is also laid to rest by the EPF. It is compulsory and an individual has no option but to contribute to it.What’s more, it ensures regular savings. According to estimates by HR firms, the average hike this year was 10.5%. How much was your hike? More importantly, did you increase your SIPs by the same proportion? Not many people care to do that. They spend more, buy more, party more but keep investing the same amount.
The EPF is different. Your contribution is linked to your income, so when you get a pay hike, your EPF contribution will go up in the same proportion.If your basic salary is `30,000 a month, you will be contributing `3,600 plus a matching contribution by your employer. If you get a 20% hike and your basic becomes `36,000, your contribution will automatically increase to `4,320. This is a great way to build a corpus in the long-term.
The icing on the cake is that you can invest more than 12% of your basic salary. Millions of Indians welcomed the move when the budget hiked the annual investment limit in the PPF to `1.5 lakh. But Delhi-based PSU manager Naveen Parashar was not one of them. “I can’t understand why salaried taxpayers are so excited about this development.They have always had the option to invest in the Voluntary Provident Fund (VPF) and get the same tax benefits offered by the PPF,” he says nonchalantly. Parashar puts an additional `14,700 into the VPF every month, taking his overall contribution to the EPF to `31,700 a month. This forced saving has helped him build a sizeable corpus in the past 15 years.
Central Provident Fund Commissioner K.K.Jalan echoes Parashar’s views. “The VPF is an ideal saving instrument for high-income earners looking to build a tax-free corpus. Unlike the PPF, there is no limit to how much one can invest,” he says.
The new look EPFO
The EPFO is fast shedding its dowdy image and using technology to turn into a more professional and nimble organisation. It has made several other investor-friendly changes in the past 12 months.Last year, it introduced the online facility for transferring the balance to a new account. This year, it has made it possible to check the account online.Going forward, all members are expected to have a Universal Account Number and this will be portable across employers and cities. In fact, UANs have already been allotted to 4.17 crore active contributors to the EPF. In the first four months of this financial year, the EPFO settled nearly 43 lakh claims. Of these, more than 68% were settled in less than 10 days.
Source : http://goo.gl/ag49rJ
Integra’s Take: If you are salaried, use Voluntary Provident Fund (VPF) smartly as there is no annual limit unlike PPF. Never withdraw your EPF balance, always chose to transfer on changing your job.
NDTV Profit | Updated On: September 13, 2014 12:35 (IST)
The Public Provident Fund (PPF) is one of the most popular tax-saving schemes. In a further boost to its attractiveness, Finance Minister Arun Jaitley in the Budget increased the ceiling on PPF investment to Rs. 1.5 lakh from Rs. 1 lakh. The government has issued a notification raising the annual PPF deposit limit to Rs. 1.5 lakh.
Mr Jaitley also increased the maximum amount eligible for deduction through permissible investments under 80C of the Income-Tax Act to Rs. 1.5 lakh, from Rs. 1 lakh. PPF is one of the financial savings that qualifies for Section 80C tax benefits. Not only the money you invest in PPF is exempt from tax under Section 80C, the interest you earn on the PPF investment is also exempt from tax.
How PPF interest is calculated: The interest on PPF account is no longer fixed and is now pegged to the yield on government bonds. The government declares the interest rate payable on PPF every year. For 2014-15, the government has announced interest rate of 8.70 per cent (compounded yearly).
The interest on balance in your PPF account is compounded annually and is credited at the end of the year. But the point to remember is that the interest calculation is done every month: the interest is calculated on lowest balances in account between 5th and the last day of the month.
So if you deposit after 5th of a month, you don’t earn interest for that month.
The ideal way to maximise the interest on your PPF account would be to invest Rs. 1.5 lakh (the maximum investible amount in a year) at one go at the beginning of the financial year. PPF accounts follow an April-to-March year so to earn the maximum interest, you should deposit the amount on/before 5th of April every year. A one-time deposit will earn interest for the whole year.
Deposits in PPF account can be made in lump-sum or in maximum 12 installments.
On the other hand, if you want to deposit some amount every month, remember to deposit on/before 5th of that month. This will help you to earn interest for that month.
Suppose, you deposit Rs. 15,000 every month in 10 instalments. A back-of-the-envelope calculation suggests that if you deposit before 5th of every month, you can earn extra monthly interest of close to Rs. 105 and for 10 months it would help you to earn Rs. 1,050 more, at the current interest rate of 8.7 per cent. For a long-term investment product like PPF, if you follow the habit of depositing before 5th of every month, it could mean bigger retirement kitty for you.
Disclaimer: “Investors are advised to make their own assessment before acting on the information.”
Integra’s Take: PPF is ideal for the Self-Employed, Businessmen, Professionals and all those who do not have access to EPF and VPF. The suggestion made in the above article suits this community as they are capable of making lump-sum investment. Save >> Regularly!
By ET Bureau | 6 Jan, 2014, 12.12PM IST | Economic Times
Multiple options. Contradictory advice. And a deadline that’s approaching fast. Many taxpayers find themselves in this situation at the beginning of the year when they have to make tax-saving investments.
Are you also confused? Before you make a choice, go through our cover story to know which is the best option for you. We have ranked 10 of the most common investments under Section 80C on five basic parameters: returns, safety, flexibility, liquidity and taxability. Every investment has its pros and cons.
The PPF may not have a very high return, but its tax-free status, flexibility of investment and liquidity by way of loans and withdrawals, gives it the crown in our beauty pageant. Equity-linked saving schemes come in second because of their high returns, flexibility, liquidity and tax-free status. However, traditional insurance policies, an all-time favourite of Indian taxpayers, manage the ninth place because of the low returns they offer and their rigidity.
Some readers might be surprised that the much reviled Ulips are in the third place. The Ulip remains a mystery and its returns are seldom tracked. We checked Morningstar’s data on Ulips and found that the returns have not been very good in the past 1-5 years. Even so, it can be a useful instrument for the smart investor who shifts his money between equity and debt without incurring any tax.
We have tried to separate the chaff from the grain by assigning a star rating to the various tax-saving options. Whether you are a novice or a seasoned investor, you will find it useful. It will help you cut through the clutter and choose the investment option that best suits your financial situation.
What the ratings mean
PUBLIC PROVIDENT FUND
RETURNS: 8.7% (for 2013-14)
This all-time favourite became even more attractive after the interest rate was linked to bond yields in the secondary market.
The PPF is our top choice as a tax saver in 2014. It scores well on almost all parameters. This small saving scheme has always been a favourite tax-saving tool, but the linking of its interest rate to the bond yield in the secondary market has made it even better. This ensures that the PPF returns are in line with the prevailing market rates.
This year, the PPF will earn 8.7 per cent, 25 basis points above the average benchmark yield in the previous fiscal year. The benchmark yield had shot up in July and has mostly remained above 8.5 per cent in the past six months. Although the yield is unlikely to sustain at the current levels, analysts don’t expect it to fall below 8.25 per cent within the next 2-3 months. So it is reasonable to expect that the PPF rate would be hiked marginally in 2014-15.
The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. However, the commission payable to an agent for opening this account has been discontinued, so you will have to manage the paperwork yourself. The good news is that some private banks, such as ICICI Bank, allow online investments in the PPF accounts with them. There’s flexibility even in the quantum and periodicity of investment.
The maximum investment of Rs 1 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. However, this facility is no longer available to HUFs.
The PPF also offers liquidity to the investor. If you need money, you can withdraw after the fifth year, but withdrawals cannot exceed 50 per cent of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. Also, only one withdrawal is allowed in a financial year.
You can also take a loan against the PPF, but it cannot exceed 25 per cent of the balance in the preceding year. The loan is charged at 2 per cent till 36 months, and 6 per cent for longer tenures. Till a loan is repaid, you can’t take more. If you dip into your PPF account, be sure to put back the amount at the earliest. Withdrawing from long-term savings is not a good strategy if you do it frequently. It can dent your overall retirement planning.
The PPF is especially useful for risk-averse investors, self-employed professionals and those not covered by the Employees Provident Fund and other retiral benefits.
BRIGHT IDEA: Invest before the 5th of the month if you want your contribution to earn interest for that month as well.
RETURNS: 17.5 per cent (Past five years)
The potential for high returns, wide choice of funds and flexibility make these funds a good tax-saving option for equity investors.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. However, this should not be the most important reason for investing in this avenue. Being equity funds, these schemes can generate good returns for investors over the long term. In the past five years, this category has created wealth for investors with average returns of 17.5 per cent.
However, this potential to earn high returns comes with a higher risk. There is no guarantee that your investment will generate positive returns after the 3-year lock-in period. The category has generated an average return of 2 per cent in the past three years. Even the best performing funds have churned out disappointing returns. The returns will naturally mirror the performance of the stock markets. Therefore, only investors who have the stomach for a roller-coaster ride should consider this option.
Should investors avoid ELSS now, especially since the stock market is close to its all-time high? Not really, because the stock market has returned to the previous high after a 6-year gap and, therefore, is not overvalued at all. “Since the stock market is reasonably valued now, ELSS should generate good returns for investors who can remain invested for 5-7 years,” says Gajendra Kothari, managing director and CEO, Etica Wealth Management.
Though the large-cap Sensex and Nifty are at higher levels, the mid-cap and small-cap indices are at much lower levels. This means there is enough value in midcap stocks, which should help the fund managers do well in the coming years. Selecting the right scheme is crucial since there is significant variation in the returns of different schemes.
Though past performance is an important parameter, also take into account the track record of the fund house and fund manager. Once you select a scheme, decide whether you want to go for the dividend or growth option. There is no difference in the tax treatment of the two options. The decision should be based on the cash-flow requirements of the investor. If you opt for the dividend option of the fund, you might get some portion of the money back within 1-2 months. Dividends from mutual funds are tax-free so there is no tax liability as well. Avoid the dividend reinvestment option for ELSS schemes because the lock-in period will prevent you from exiting fully.
Though the ELSS funds invest in equities, they are different from other open-ended diversified equity funds. Due to the lock-in period, the ELSS fund manager does not have to worry about redemption pressure from investors. This gives him the freedom to invest in shares as per his conviction and hold them for longer periods.
In the past few years, the ELSS category has consistently outperformed the large and midcap sub-category of diversified equity funds (see graphic).
ELSS funds offer tremendous flexibility to investors. As mentioned earlier, the 3-year lock-in period is the shortest. Since there is no tax on gains from equity funds after a year, an investor can safely recycle his investments every three years and claim tax benefits on the reinvested amount.
Young taxpayers, who have taken huge loans and don’t have enough surplus to save tax, will find these schemes very useful. If you can help it, don’t exit the scheme after three years just because lock-in period is over. Studies show that equities give better returns in the long term. The minimum investment is also very low.
Though regular equity mutual funds have a minimum investment of Rs 5,000, you can put in as little as Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan or an insurance policy, there is no compulsion to continue investments in subsequent years. Since ELSS funds are a high-risk investment and their NAVs are volatile, you need to stagger your investment over a period of time instead of going for a lump-sum investment at the end of the financial year. This is more important at this juncture when the benchmark indices are trading close to their all-time high levels.
Your best option is to take the SIP route. This may not be possible now because you have less than three months before the 31 March deadline. At best, you can split the investment into three tranches. Before you take the plunge, remember that your investment should be guided by your overall asset allocation. If your exposure to equities is lower than what you want, go for the ELSS fund. If your portfolio already has too much equity, avoid investing in these funds.
BRIGHT IDEA: Don’t invest a lump sum. Split investments in ELSS funds into three SIPs starting from January till March.
RGESS: An avoidable option for the first-time equity investor
The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional tax savings under the newly introduced Section 80 CCG. If you invest in the RGESS options, you can claim a deduction of 50 per cent of the invested amount. The maximum investment is Rs 50,000, so the maximum deduction availed of can be Rs 25,000. This is over and above the Rs 1 lakh limit available under Section 80C.
The scheme permits investments in the BSE-100 or CNX 100 shares, shares of Maharatna, Navratna or Miniratna PSUs, or in designated equity mutual funds and ETFs. Should you invest in it to avail of this benefit? We would not advise investing directly in shares just to claim tax deduction. In fact, the first-time investors are better off taking the mutual fund route.
If you do opt for any RGESS fund or ETF, your investment is locked in for three years (fixed lock-in period during the first year, followed by a flexible lock-in period for the two subsequent years). Under the flexible lock-in option, you are allowed to sell your RGESS shares or mutual funds units and reinvest the proceeds in any other RGESS instrument. This will enable you to get rid of the underperforming investments and shift to better options. However, in the absence of an SIP facility, you are exposed to market timing.
Also, the maximum tax saving you can get through this scheme is Rs 7,725 for those in the 30 per cent income tax bracket. In the 20 per cent bracket, the maximum saving is Rs 5,150, while you save only Rs 2,575 in the 10 per cent bracket. This is not much considering the risk you are taking by investing in equities. Besides, investors will also need to open a demat account to invest in the RGESS, which would incur annual charges.
RETURNS: 7.2-11.8 per cent (Past five years)
Don’t go by the past record. The new Ulip is a good way to invest in the equity and debt markets for tax-free returns.
There’s a good reason why this most hated investment is so high on our rating scale. For many policyholders, Ulips denote the costly mistake they made a few years ago. But that was a different era, when companies were gobbling up 50-60 per cent of the premium in the first few years in the guise of charges.
The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly investment. Though a Ulip should not be your first insurance policy, you can consider buying one as an investment that also helps you save tax. Of course, it also offers a life cover, but the stress is on investment, not protection. Don’t buy a Ulip (or any other insurance policy, for that matter) if you are not sure whether you can continue paying the premium for the entire term. If you end it prematurely, be ready to pay surrender charges.
Your insurance policy should not impinge on other financial commitments. It’s easy to set aside a big sum when you are young because your liabilities are limited, but this changes and expenses shoot up when you start a family or buy assets. If the premium is very high, the policyholder may find it difficult to pay it year after year.
Under the new Ulip rules, you cannot take a premium holiday. If you stop paying the premium, the policy will be discontinued. Also, you need to take a long-term view when you buy an insurance plan. A Ulip will yield good results only if you hold it for at least 10-12 years. Before that, the plan may not be able to recover the charges levied in the first few years. This is why short-term plans of 5-10 years usually give poor results, which pushes investors to dump them within 3-4 years of buying.
Buyers must also understand that a Ulip is not necessarily an equity-linked investment. You can also invest your Ulip corpus in debt funds. Right now, debt funds are looking attractive because of the possibility of a drop in bond yields, while the equity markets are looking overheated. Instead of investing in the equity option, put your corpus in the debt fund.
You can start shifting the money to the equity fund when the prospects look rosier. Only a Ulip allows you to switch from debt to equity, or vice versa, without incurring any capital gains tax. It is best to invest in a plain vanilla Ulip that allows you to choose your investment mix and also offers online transaction facilities.
BRIGHT IDEA: Opt for the liquid or debt fund and then shift to the equity option as per your reading of the market.
RETURNS: 8.5 per cent (for 2013-14)
This little used option is available only to salaried taxpayers covered by the Employees’ Provident Fund.
The contribution to the Employees’ Provident Fund (EPF) is a compulsory deduction, as also an automatic tax saver. However, you can contribute more than 12 per cent of your basic salary that flows into the EPF every month. This voluntary contribution will earn the same rate of interest, will fetch you the same tax benefits under Section 80C and the maturity corpus will also be tax-free.
A key disadvantage is the limited liquidity that the Provident Fund offers. You cannot access the money till you retire. A one-time withdrawal is allowed in special circumstances, such as medical emergency, purchase or construction of a house, or a child’s marriage. However, it may not be possible to opt for the VPF at this juncture.
Companies typically ask their employees to submit the VPF mandate at the beginning of the financial year. Ask your company if you can start contributing to the VPF from this month onwards. Once you have opted for the deduction, you cannot discontinue it till the end of the financial year, except in extraordinary circumstances. While the VPF gets tax deduction and the maturity corpus is also tax-free, you will have to pay tax on the interest if you withdraw the money within five years. So, opt for it only if you are sure that you can remain invested for the long term.
Another drawback is the possibility of a lower interest rate for the PF in the coming years. The rate is announced by the EPFO Trust after examining the interest earned by the EPF corpus. It is likely to be 8.5 per cent for the current financial year, but there is no certainty that this will be maintained over the longer term.
Contributing to the VPF is suitable for taxpayers in their 50s, who want to aggressively save for their retirement but don’t want to invest in market-linked options or tax-inefficient fixed deposits.
BRIGHT IDEA: Channelise at least 10 per cent of your increment to the VPF every year. The higher savings will not pinch you.
SENIOR CITIZEN’S SAVING SCHEME
RETURNS: 9.2 per cent (for 2013-14)
This remains the best way for retirees to save tax, though the Rs 15 lakh investment limit is a damper.
With four stars, this assured return scheme is the best tax-saving avenue for senior citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility as a tax-saving option. The interest rate is 100 basis points above the 5-year government bond yield.
Unlike the PPF, the change in interest rate does not affect the existing investments. This year, the interest rate has been cut by a marginal 10 basis points to 9.2 per cent. Many grey-haired investors may not be enthused by this. Banks are offering up to 10 per cent to senior citizens right now, almost 50-60 basis points higher than what they give to regular customers.
There’s a good reason for this pampering. Senior citizens have a bulk of their investments in fixed deposits, which which makes them prized customers for banks. So, if you do not consider the tax deduction under Section 80C, this option is not as lucrative as bank FDs. However, as a tax-saving tool, the scheme scores over bank fixed deposits and NSCs because the quarterly payment of the interest provides liquidity to the investor. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.
This aspect of the SCSS, and the fact that it is an ultra safe scheme backed by the government, makes it an ideal option for retired taxpayers looking for a steady stream of income. Though the interest earned is fully taxable, retired people usually don’t have a high tax liability. Keep in mind that the basic tax exemption for senior citizens is higher at Rs 2.5 lakh. For very senior citizens, it is even higher at Rs 5 lakh.
The only glitch is the Rs 15 lakh investment limit per individual. If a person parks Rs 15 lakh of his retiral benefits in the scheme, he will be able to claim deduction for only Rs 1 lakh. Although the scheme is for senior citizens (60 years), even those above 55 years can invest if they have taken voluntary retirement. Retired defence personnel can join irrespective of their age if they fulfil other conditions.
BRIGHT IDEA: If you have Rs 15 lakh to invest in the scheme, stagger the investments over 2-3 years to claim more tax benefits.
NEW PENSION SCHEME
RETURNS: 4.2-10.2 per cent (past 3 years)
The low-cost retirement product is a good option fro those saving for retirement, but watch out for the limited liquidity it offers.
Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. However, even though the fund management charges have been raised from the ridiculously unviable 0.0009 per cent to a more reasonable 0.25 per cent, the pension fund managers are not hardselling the scheme.
If you want to save tax through the NPS this year, be ready to do a lot of legwork and paperwork before you can get to invest in this unique pension plan. The returns from the NPS funds are a mixed bag (see table).
While the returns from the E class (equity) funds are in line with the market returns, those from the G class (gilt) funds are quite a disappointment. Government employees, who have a chunk of their pension funds in the G class schemes of LIC Pension Funds and SBI Pension Funds, would be especially hit. The redeeming feature is the high returns churned out by the C class (corporate bond) funds. However, these bonds carry a higher risk.
The scheme scores high on flexibility. The minimum annual contribution is Rs 6,000, which can be invested as a lump sum or in instalments of at least Rs 500. There is no upper limit. The investor also decides the percentage of the corpus that goes into equity, corporate bonds and government securities, the only limitation being the 50 per cent cap on exposure to equity.
One of the most outstanding features of the NPS is the ‘lifecycle fund’. It is meant for those who are not financially aware or can’t manage their asset allocation themselves. It is also the default option for someone who has not indicated the desired allocation for his investments. Under this option, the investor’s age decides the equity exposure. The 50 per cent allocation to equity is reduced every year by 2 per cent after the investor turns 35, till it comes down to 10 per cent. This is in keeping with the strategy to opt for a higher-risk, higher-return portfolio mix earlier in life, when there is ample time to make up for any possible black swan event.
Gradually, as the investor approaches retirement, he moves to a more stable fixed-return, low-risk portfolio. This automatic rejigging of the asset allocation is a unique feature of the NPS. No other pension plan or asset allocation mutual fund offers such a facility to investors. There are a few funds based on age, but they are one-size-fits-all solutions, not customised to the individual’s age.
Another positive feature of the NPS is the wide choice of funds for the investor. Though you can switch from one fund manager to the other only once in a year, it is still better than investing in a Ulip or a pension plan where you are stuck with the same fund manager for the rest of the tenure. IDFC Pension Fund quit the NPS last year, but two well-regarded entities — HDFC Pension Fund and DSP Blackrock Pension Fund — have joined the club.
Another unique feature of the NPS is the tax benefit it offers under the newly added Section 80 CCD(2). Under this section, if an employer contributes 10 per cent of the salary (basic salary plus dearness allowance) to the NPS account of the employee, the amount gets tax exemption of up to Rs 1 lakh. This is over and above the Rs 1 lakh tax deduction under Section 80C. It’s a win-win situation for both because the employer also gets tax benefit under Section 36 I (IV) A for his contribution.
By putting in money in the NPS, the employer can provide an additional tax benefit to the employee by simply reorganising the salary structure without incurring any additional cost to the company (CTC). The wart in the NPS is the lack of liquidity. You cannot access the funds before you turn 60. On maturity, at least 40 per cent of the corpus must be used to buy an annuity. Some see this as a positive feature that prevents premature withdrawals.
BRIGHT IDEA: Get your company to opt for the Section 80CCD(2), under which you can save more tax through the NPS.
NSCs AND BANK FDs
RETURNS: 8.5-9.75 per cent
They appear attractive, but taxability of income takes away some of the sheen from these instruments.
There are many misconceptions about bank fixed deposits in the minds of investors. Many think that up to Rs 10,000 interest from bank deposits is tax-free, as announced in the budget two years ago. This is not true. The newly introduced Section 80TTA gives a deduction of up to Rs 10,000 on interest earned in the savings bank account, not on fixed deposits and recurring deposits.
Also, the nomenclature ‘tax-saving deposits’ means you save tax under Section 80C. It does not mean that these deposits are tax-free. The interest earned on deposits is fully taxable at the normal tax rate applicable to you. You have to mention this interest under the head ‘Income from other sources’ in your income tax return. Keep in mind that this tax is payable every year on the interest that accrues in that financial year, even though you get the amount on maturity.
So don’t get misled by the high interest rates offered on the 5-year bank fixed deposits. The post-tax yield may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of the tax-free PPF.
The second misconception is that there is no need to pay tax if TDS has been deducted by the bank. You may have to pay tax even if TDS has been deducted. TDS is only 10 per cent (20 per cent if you haven’t submitted your PAN details), and if you are in the 20-30 per cent bracket, you need to pay additional tax. Ignore mentioning the interest income in your return at your peril. The TDS is credited to your PAN and reported to the tax authorities. If there is a mismatch in the TDS details in the tax records and in your return, you will surely get a tax notice.
The Central Board of Direct Taxes has a computer-aided scrutiny system (CASS), which flags any discrepancy in the tax return filed. Check the TDS in your Form 26AS, which has details of the tax deducted on your behalf. It can be easily checked online. It is easier if you have a Net banking account with any of the 35 banks that offer this facility. Otherwise, you can go to the official website of the Income Tax Department and click on ‘View your tax credit’. The first-time users will have to register, but it takes less than 5 minutes to log on and view your details.
The interest on NSCs is also taxable but very few taxpayers include it in their returns. However, with the integration of tax records, a taxpayer may not be able to escape the tax net easily. For instance, if you have claimed tax deduction under Section 80C for investments in NSCs or FDs in one year, the tax department may want to know why the interest earned is not reflecting in your tax returns for subsequent years.
BRIGHT IDEA: Don’t try to avoid the TDS by investing in FDs of different banks. You will have to pay the tax later anyway.
LIFE INSURANCE POLICIES
RETURNS: 5.5-7.5 per cent
Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will find the tax-free corpus appealing.
Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly by ensuring a higher surrender value and larger life covers, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy. Money-back and endowment insurance policies score low on the flexibility scale. Once you buy a policy, you are supposed to keep paying the premium for the rest of the term. This can be a problem if you took the policy only to save tax.
However, these policies are not as illiquid as they appear. You can easily get a loan against your endowment policy from the LIC. The terms are quite lenient and repayment can be done at your convenience. Insurance companies claim their products offer the triple advantage of life cover, long-term savings and tax benefits. That’s not true. Traditional plans give a low life cover of 10 times the premium.
For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give niggardly returns. The internal rate of return (IRR) for a 10-year policy comes to around 5.75 per cent. For longer terms of 15-20 years, the IRR is better at 6.5-7.5 per cent. As for the tax benefit, there are simpler and more cost-effective ways to save tax, such as 5-year bank FDs and NSCs. If the taxability of the income worries you, go for the tax-free PPF.
However, traditional insurance policies still make a lot of sense for the HNI investor who is more concerned about the tax–free corpus under Section 10(10d) than the deduction under Section 80C. Even for such investors, a Ulip will make more sense as they will have control over the investment mix. The opacity of the traditional plan is best avoided, but your agent might not be very keen to sell you a Ulip this year because his commission has been cut to 6-7 per cent of the premium.
RETURNS: 7-10 per cent
After a hiatus of 2-3 years, pension plans are making a comeback, but the high charges mean lower returns for investors.
Pension plans offered by life insurance companies made a comeback in 2013. However, the charges of these plans are significantly higher than those of the NPS. While the NPS has a fund management charge of 0.25 per cent, a typical pension plan from a life insurance company charges almost 3-4 per cent. This difference can snowball into a wide gap over the long term, reducing the returns of the pension plan investor by a significant margin.
Insurers argue that the low-cost NPS is good only on paper because there are so many hurdles to investing in the scheme. A pension plan from an insurer is costlier but you don’t have to go around in circles trying to invest in it. That’s true to a great extent. Even after four years of launch and offering additional tax benefits, the NPS has not been able to attract investors in hordes. However, the solution is not a high-cost pension plan.
A few mutual funds also have pension plans. The Templeton India Pension Plan is one of the oldest schemes in the market and offers deduction under Section 80C. It is a debt-oriented fund that invests 30-40 per cent of its corpus in equities and the rest in debt. But at 10.7 per cent, its 5-year annualised returns are nothing to gloat about. A better option would be a combination of an ELSS scheme and any of the debt instruments that offer tax deduction.
BRIGHT IDEA: It is not a good idea to invest a large sum in the equity option at one go. Opt for the liquid or debt fund instead.
Source : http://goo.gl/9I8cz9
By Prashant Mahesh, ET Bureau | 22 Nov, 2013, 05.55AM IST | Economic Times
Investors are wary of investing in tax-saving mutual funds (equity-linked savings schemes or ELSS in mutual fund parlance) this tax-planning season, say financial advisors. The abysmal performance of these schemes in the past three years and the current higher level of the market are cited as the reasons for investor disinterest.
According to Value Research, a mutual fund tracking entity, ELSS funds, as a category, have given a mere 0.33% returns in the last three years. With the tax ..
Investors can avail of a tax deduction of up to Rs 1 lakh under Section 80C by investing in a host of options like ELSS, tax-saving 5-year bank fixed deposits, the Public Provident Fund (PPF) or National Savings Certificate (NSC), among others.
“Investors, who invested in ELSS three years ago, are disappointed with lower returns. Clearly, they are not keen to invest in tax-saving mutual funds again and they prefer to invest in either PPF or tax saving bank deposits,” says Abhishek Gupta.
“Since investors have not made money for three years, they have turned risk averse, and want to protect capital,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. That is the main reason why many investors would flock to PPF or tax-saving bank deposits.
Invest as per asset allocation: However, experts frown upon such “random” tax-planning exercise. They argue that investors should consider tax planning as part of their overall financial plan and choose products accordingly. They say picking tax planning instruments on the basis of past performance alone won’t help one reach the right conclusions.
“Make a financial plan based on your earnings, liabilities and goals. This financial plan will tell you how much money would go into various assets like equity, debt or gold. Some part of the equity portion of this plan could go into ELSS,” says Mukund Seshadri, founder, MSV Financial Planners. Advocates of ELSS also claim that it is the right time to get into stocks due to attractive valuations.
“The Sensex trades at a P/E of 18 times, making valuations attractive and leaving scope for appreciation over a 3-5-year period,” says Rupesh Bhansali, head (distribution), GEPL Capital. Experts also say that investors should also try to find out the details of the product they are investing. For example, consider the case of these disenchanted investors opting for PPF or 5-year bank deposits.
Chances are that most of them haven’t thought about the different lock-in periods in these options. “If you have a time-frame of five years, opt for tax-saving bank deposits. Opt for PPF only if you can wait for 15 years,” says Abhishek Gupta.
Sure, you can withdraw from PPF after five years, but for some specific purposes only. Also, you have to keep your PPF account alive by investing a minimum ofRs 500 every year. Currently, a tax-saving deposit in SBI for five years will give you an interest rate of 9%, while PPF gives you 8.7%.
However, financial planners suggest you keep tax treatment in mind while making these investments, as interest income is taxed differently. “Interest earned from PPF is tax free, whereas interest income from bank FDs and NSCs are taxable. Hence, if you are in the 30% tax bracket, PPF may be a better investment from a tax perspective,” says Harshvardhan Roongta, chief financial planner, Roongta Securities.
Source : http://goo.gl/uLSu4X
By Sanjeev Sinha | ECONOMICTIMES.COM | 1 Oct, 2013, 03.30PM IST
A provident fund (PF) is basically a plan to provide financial security after retirement. It is, therefore, not advisable to withdraw any amount from one’s provident fund account as PFs are primarily meant for retirement planning, and retirement planning is the most important goal in any person’s life.
“No need to say one should avoid doing so unless there is a great emergency, as the amount should be utilized post one retires or in case one stops working and his/ her earnings have depleted. For other emergencies, one should look at money from investments in other instruments like debt funds, liquid funds or a savings bank account, etc,” suggests Anil Chopra, Group CEO, Bajaj Capital.
In fact, there are various advantages of investing in a provident fund (PF). Generally, the return on provident fund is higher than inflation, and is totally tax fee. Thus, withdrawing out of it would have the following consequences:
1) Retirement planning would go haywire
2) Tax-free status would be lost because that money cannot be put back. For example, let’s say, someone has a balance of Rs 50 lakh in his provident fund account, and he wishes to withdraw Rs 25 lakh out of that. This amount of Rs 25 lakh cannot be put back into it later, as it is not allowed as per rules.
Therefore, “withdrawal from a PF account is generally discouraged, as the purpose of opening it and accumulating money there is mainly for the second innings of your life, which is post retirement,” says Chopra.
Nitin Vyakaranam, Founder & CEO, Arthayantra.com, is of similar opinion. “Withdrawing PF stands out as the classic case of lack of prioritization and holistic approach in our financial decision making process. By making withdrawals from the PF to fund other goals, we end up pushing our retirement age or making higher contributions towards building retirement fund during the last few years of our employment,” he says.
However, in case one wants to withdraw money from his/ her PF account, the rules for the same are very stringent, which also vary as per the types of provident funds. In India PFs are of three kinds:
a) Public Provident Fund (PPF) – For general public
b) Employees Provident Fund (EPF) – For private sector employees
C) General Provident Fund (GPF) – For government sector employees
In case of PPF, which is normally meant for 15 years, withdrawal is allowed before that also, but under very stringent norms. For example, no amount can be withdrawn at all for the first six years. After six years, the amount equivalent to 50 per cent of the balance, which was there more than 3 years ago, can be withdrawn. Thus, the entire money cannot be withdrawn before the end of 15 years. Even after 15 years, it can be rolled over for another period of 5 years and after that every five years it can be rolled over or closed.
Similarly, in case of EPF or GPF, withdrawal is not allowed generally unless one has given up working or wants to be self-employed, etc. As per EPF rules, you are allowed to withdraw money only if you have no job at the time of withdrawing your fund and if 2 months have passed. Only transfer is allowed in case you have switched to a new job. Some people, however, withdraw the EPF after 60 days of leaving the organization, stating that they don’t have any job, but this is illegal as per the EPF rules, if you are doing so after switching to a new job.
Thus, if you have no job at the time of withdrawing your fund and if 2 months have passed after leaving your organisation, then you are allowed to withdraw the fund. A declaration is required to be given stating the reason for the same. Otherwise, partial withdrawal is allowed in certain cases, which is in the form of loan, where one has to pay back that amount later and before that, has to state the reason for opting for withdrawal, for example, self or daughter’s marriage, buying a home, education of self or children, medical treatment for self or family, among others.
There are certain specified criteria under which partial withdrawal is permitted. In case of education or marriage, for instance, the employee should have completed at least 7 years of employment or service. The maximum aggregate withdrawal can’t exceed 50 per cent of the total contributions made by you and withdrawal can be made only thrice during a person’s total service tenure. Proof of education or wedding is also required to be submitted.
Likewise withdrawal is permitted for medical treatment of self, spouse, parents and children. In this case, however, there is no restriction regarding the number of years of service. But the maximum amount one can withdraw is six times the basic salary and proof of hospitalization is required.
In case you wish to withdraw from your EPF account for purchase/construction of a house, then you need to have completed at least 5 years of service. The maximum withdrawal amount is 36 times your monthly salary (for construction of property) and 24 times (for purchase of property). In this case withdrawal is allowed only once during the entire service tenure.
For alteration or renovation of house, withdrawal is allowed up to 12 times your monthly salary and only once during the entire service tenure. But the house need to be registered in your or your spouse’s name or should be owned jointly.
If you need to withdraw for repayment of home loan, then you should have completed at least 10 years of employment. The maximum withdrawal amount is 36 times the monthly salary of yours and withdrawal is allowed only once during the entire service tenure.
If one has retired or stopped working, he/ she needs to fill a PF withdrawal form and share his/ her bank account number, which has to be counter signed by the employer. After this, the money is directly sent to one’s bank account. The process takes longer in case of EPF – anywhere between 2 weeks to may be up to two months also.
“On the other hand, if you have a PPF account, withdrawal is very easy after completion of 15 years. You can collect the demand draft or cheque by going to the post office or bank on the same day or get the money transferred in your bank account. Thus, one can get the money in a day’s time,” informs Chopra.
Also, if one wishes to withdraw before the end of 15 years, let’s say 6 years, the amount which can be withdrawn as per rules will be calculated, and by filling an application in the prescribed format, it can be taken out maximum in one day’s time. Thus, withdrawing from PPF is easier than withdrawing from EPF or GPF.
Source : http://goo.gl/uvbGAr
By ET Bureau | 8 Jul, 2013, 12.13PM IST12 comments | Economic Times
As the 31 July deadline approaches to file your returns, here’s how to ensure you don’t commit errors and receive a tax notice.
1) Availing of deduction twice
This is a common error that many salaried taxpayers commit. If you had switched jobs during the previous financial year, you might have got the Form 16 from both employers. While the first company may have deducted the tax correctly, the second might have deducted very little. It would have considered only the income for the rest of the year and given you the basic exemption of Rs 2 lakh, as also the deduction under Section 80C. However, these must have already been factored in by the previous company. “You might have to pay additional tax in such a situation,” says Sudhir Kaushik, co-founder of tax filing portal, Taxspanner. com.
Don’t think you can escape by ignoring the previous income in your tax return. The computerised scrutiny will immediately detect the discrepancy. There will also be a mismatch in your TDS details because the previous employer would have deposited the TDS on your behalf, along with your PAN and other details.
2) Not mentioning exempt income
Dividends are tax-free. So are longterm capital gains from stocks and equity funds, as well as the interest on your PPF investments and tax-free bonds. There is also no tax to be paid on agricultural income and gifts from specified relatives. Even though these are tax-free, all exempt incomes must be mentioned in the tax return. Ignore this at your peril.
The new rules for tax filing announced this year state that if the total exempt income during the year exceeded Rs 5,000, you will have to use ITR 2 to file your return.
3) Not including interest
Last year’s budget had introduced a new Section 80TTA, which gives a deduction of up to Rs 10,000 on interest earned on your balance in the savings bank account. Many taxpayers think this deduction also includes the interest earned on bank deposits. The interest earned on fixed deposits and recurring deposits is fully taxable at the normal rate. You have to mention it under the head ‘Income from other sources’ in your tax return.
Tax is payable even if the TDS has been deducted. TDS is only 10% (20% if you haven’t submitted your PAN details), and if you are in the 20-30% bracket, you need to pay additional tax. The interest on NSCs is also taxable.
4) Not checking TDS details
Before you file your returns, check whether the tax you had paid for last year has been correctly credited to your name. The Form 26AS has details of the tax deducted on behalf of the taxpayer and can be easily checked online. It is easier if you have a Net banking account with any of the 35 banks that offer this facility.
Otherwise, you can go to the official website of the Income Tax Department and click on ‘View your tax credit’. The first-time users will have to register, but it takes less than 5 minutes before you can log on and view your details.
5) Not mailing ITR V in time
The ITR V is the acknowledgment of your tax return. It is to be submitted along with your return if you file offline. If you have efiled your return without a digital signature, you need to take a print of the ITR V, sign it and send it to the CPC in Bangalore by ordinary mail.
This should be done within 120 days of uploading your return. The filing process is complete only after the ITR V is received at the CPC. You can check the status of your ITR V on the official website of the Income Tax Department. If it has not been received within 7-10 days of mailing, call up the Ayakar Sampark Kendra or send another copy.
Source : http://goo.gl/fkGnY
Neha Pandey Deoras & Shivani Shinde | Bangalore/ Mumbai April 7, 2013 Last Updated at 22:30 IST| Business Standard|
For retirement solutions, financial advisors prefer sticking to a combination of EPF/PPF and equity mutual funds
Bangalore-based Dirk Lewis, 30, who works for a leading information technology services company, plans to subscribe to the National Pension System (NPS) from the next financial year (2014-15). His company offers the NPS option to its employees, over and above the mandatory Employees’ Provident Fund (EPF) provision.
“NPS would help me save more on the tax front. Also, knowing myself, I would save only when I am forced to. This way (through NPS), I would be able to build a neat corpus for my retired life. I have some expenses this year, which wouldn’t allow me to contribute towards NPS,” says Lewis.
A host of companies, including Infosys, Wipro, Reliance Industries, Muthoot Finance, Colgate-Palmolive, Capgemini and Pantaloons, offer the NPS option.
Samir Gadgil, general manager and global head (compensation and benefits), Wipro, says the company has been seeing good traction from employees interested in NPS, over and above EPF. “On an average, annual contribution stood at Rs 4-6 crore. And, the number of employees subscribing to the scheme is growing on an annual basis,” he says.
Wipro recommends NPS for product diversification, as well as a substitute for voluntary contribution towards EPF, Gadgil says.
Some companies say primarily, those in the 30-35 age bracket are subscribing to NPS, as they are aware the product’s equity component could deliver good returns through 30 years.
George Alexander Muthoot, managing director of Muthoot Finance, feels NPS would help his employees build a decent retirement fund.
A company can either offer investment options at the subscriber level, allowing employees to choose the pension fund manager and the asset allocation (active choice), or at the company level, in which case the company decides the fund manager and the asset allocation (auto choice). Under the latter, the company may opt for the portfolio mandated for central government employees and choose from the three government fund managers – LIC Pension Fund, SBI Pension Fund and UTI Retirement Solution – or from schemes and fund managers for the voluntary sector.
All one has to do is subscribe to NPS and ask his/her employer to deduct a fixed amount every month or year. Many companies also contribute towards their employees’ NPS and get tax benefits under Section 80CCE by terming this business expenditure in their profit-and-loss accounts. Even the employer’s contribution of up to 10 per cent of basic and dearness allowance is eligible for deduction, though such employers later deduct their contribution from the employee’s salary. Most companies ask for an annual contribution of at least Rs 6,000 (once a year), or at least Rs 500 a month. Many companies have spread awareness on NPS among employees through web seminars, group discussions and helpdesks at their campuses.
Financial planners, however, aren’t too enthused by NPS (compared to EPF), though comparing the two isn’t fair—while EPF is purely a debt product, NPS also invests in equity. Certified financial planner Arnav Pandya feels EPF is meant for those who do not understand investment very well—they simply put away money in EPF and earn handsome returns. NPS, however, is meant for those who have a fair knowledge on investment and can choose funds. “NPS is a product that should figure in the list you consider for investing for your retirement, whether you put money into it or not,” he says.
For Mumbai-based certified financial planner Gaurav Mashruwala, in their current forms, EPF scores over NPS, a view shared by Sumeet Vaid of Freedom Financial Planners.
“Simply put, EPF is slightly market-driven to the extent of investing in government securities, while NPS is about 50 per cent market-driven, due to the equity component. As a result, returns are safe in EPF, not in NPS. There is a small cost attached to investing in NPS, but there is no cost in investing in EPF,” says Mashruwala.
Also, NPS has withdrawal limits; EPF does not—it offers premature withdrawal for specific purposes (house construction, marriage and illness), without foreclosure. Any premature withdrawal leads to account closure in the case of NPS. Up to 20 per cent of the funds can be withdrawn from NPS before one turns 60; the rest has to be used to buy annuity. Also, you can easily stop contributing towards EPF in desperate times; you can’t do so with NPS.
“One NPS fund manager I met recently told me they don’t make money on NPS asset management; they hardly rejig the portfolio on the back of market conditions,” says an industry expert. If fund managers aren’t paid adequately, returns may soon start declining. The expert, therefore, feels the government should look at developing the product to make it more investor-friendly.
Also, NPS returns aren’t very attractive. The Employees’ Provident Fund Organisation (EPFO) gives 8.5 per cent returns to subscribers. Till August 2012, returns offered by NPS stood at 6-11 per cent (an average of 8.5 per cent). Though NPS should give better returns (compared to EPF) due to the equity component, this hasn’t been the case. Therefore, it hasn’t appealed to investors or financial advisors. Vaid says many company trusts that manage EPF money on their own have delivered higher returns – 9-9.5 per cent. Therefore, it might not be sensible to consider NPS.
Like Lewis, most look at NPS from a tax-saving perspective. Even then, the product doesn’t seem lucrative. An employee’s contribution of only up to 10 per cent of the basic and dearness allowance is eligible for deduction under Section 80CCD (this amount is within the Rs 1-lakh limit, under Section 80C). Most taxpayers exhaust a substantial part of the Section 80C limit through EPF contribution, which can be invested up to Rs 1 lakh, completely tax-free. Hence, contributing to NPS is hardly of any use, as long as you are an indisciplined investor and need to be forced into investing. A withdrawal from NPS is taxable at the slab rate and so is the annuity to be earned after retirement.
Therefore, Mashruwala advises sticking to EPF or Public Provident Fund (PPF), which offer annual returns of 8.7 per cent, and taking the equity-oriented balanced fund route to add equity to the retirement portfolio. According to mutual fund rating agency Value Research, equity-oriented balanced funds returned about seven per cent in the past year.
Financial experts feel for self-employed individuals, too, PPF scores over NPS, as investments of up to Rs 1 lakh in PPF are completely tax-exempt.
While Gadgil says an employee can continue using his NPS account even after quitting an organisation, Vaid is doubtful about whether an employee would be disciplined enough to continue investing on his own, as the organisation he joins next may not offer NPS. He says, “Servicing is better when a product is offered by an organisation. This might not be true for independent NPS accountholders. NPS’ product structure might not be easy to understand for most.” He recommends a combination of EPF/PPF, debt funds and index funds. In the past year, the BSE Sensex returned about nine per cent, while the National Stock Exchange’s Nifty gave eight per cent returns. From a tax point of view, too, equity is very efficient—if held for more than a year, returns from equity investment are tax-free in the hands of investors. Across categories, debt funds have returned 9-11 per cent higher than NPS. Also, if held for more than a year, debt funds get indexation benefits.
By Ravi Ranjan Prasad Apr 07 2013 , Mumbai | Financial Chronicle|
Be sure you make full use of the 8.7% interest rate for FY14
April is the month to allocate major portion of public provident fund (PPF) investment planned for the financial year to get maximum benefit of high interest rate.
Some people keep postponing the PPF investment thinking that they will invest later during the financial year and play with risky assets like equity to make quick gains towards the beginning of the financial year.
This way you may lose on the Rs 1,00,000 limit later as at the closing of the financial year (March 2014), you may not have adequate liquidity to cover the limit and a great opportunity of compounding interest rate will be lost for one more time.
If the money planned for investment in PPF during the financial year is invested at the beginning of April, almost full interest rate of 8.7 per cent fixed for the financial year 2013-14 will accrue in the PPF account. For the next financial year, it will give a big boost to the outstanding principal amount on which the fresh PPF interest rate will be calculated.
For PPF investors, financial year 2012-13 was a good year, as the interest rate was revised upward to 8.8 per cent from previous year’s 8.6 per cent, and also the annual investment limit per individual was raised from Rs 70,000 to Rs 1,00,000.
Since this year the PPF rate has been revised downward, it makes more sense to start early in the year to make up for the 0.10 per cent reduction in the interest rate.
PPF interest rates are announced every year in March by the government for the upcoming financial year. This rates is benchmarked against the 10-year government bond yield.
No tax is payable on interest earned from PPF investment. Also the investment made in PPF account are eligible for deduction under Section 80C of the Income-Tax Act.
For those also eyeing tax relief by investing in PPF under Section 80C, should decide on the investment amount after deducting unavoidable investments, if any, in employee provident fund (EPF), life insurance and other such options. The total tax benefit can not exceed Rs 1,00,000.
Suresh Sadagopan, chief financial planner, Ladder 7 Financial Advisory, said, “PPF continues to be a good vehicle to invest because of attractive returns. People should look at it as a serious vehicle for long-term goals, like retirement, child’s education and marriage.”
The government has created PPF as an option for those who are self employed, while those who are employed have both the options of EPF and PPF to achieve their long-term goal.
PPF account can be opened either at designated banks like State Bank of India, Bank of India, ICICI Bank, or post office in your neighbourhood.
In banks’ PPF account, one can now make online deposits and avoid the hassle of standing in a queue at the bank’s branch. Post offices do not provide online investment facility so far.
PTI | Mar 25, 2013, 03.15PM IST | timesofindia.com
NEW DELHI: Millions of small savers and PPF account holders will earn less on their post office savings schemes, with the government deciding to reduce interest rates on them marginally by 0.10%.
The interest rate of Public Provident Fund (PPF) has been lowered from 8.8% to 8.7% with effect from April 1, 2013, said a finance ministry statement.
However, the rates on savings deposit schemes and on fixed deposit of up to one year run by post offices has been kept unchanged at 4% and 8.2%, respectively.
Further, monthly income schemes (MIS) of 5 year maturity will earn an interest of 8.4%.
The national savings certificates ( NSC) having maturity of five and 10 years will now attract 8.5% and 8.8% interest respectively, down 0.10% each.
The interest rates would be applicable for the entire 2013-14 fiscal.
The rate for senior citizens savings scheme (SCSS) will now stand at 9.2%, down from 9.3%.
The revision in interest rates follows a decision taken by government last year to link the small savings returns with the market rate. The new rates are required to be announced at the beginning of a financial year.
The decision is in line with the recommendations of Shyamala Gopinath Committee, which had suggested that returns should be in sync with market rates determined by the returns offered by other securities.
Source : http://goo.gl/Xk2m9
Srikant Subramanian| 12-03-13| Morningstar.in
It is appraisal time and several salaried individuals are likely to be anxiously anticipating the year-end performance bonuses.
In this article, we present a five-point checklist that details how individuals can use their bonus effectively.
1. Repay Expensive Loans
First and foremost, start reducing your liabilities. Begin by repaying any expensive credit card, personal loans that you may have availed. You can also partly repay that mammoth home loan or education loan that you have taken. Although home and education loans provide tax incentives, you could repay in such a manner that you maximize the incentives, while reducing your liability.
For instance, if the interest and principal components of your home loan exceed Rs 1.5 lakhs and Rs 1 lakh respectively, you can prepay an appropriate amount such that the interest and principal components would come closer to limits stipulated above. The intent is rid yourself of liabilities to the extent possible.
2. Start a PPF account
If you don’t have a Public Provident Fund (PPF) account as yet, use the bonus amount to get started with one. PPF can make for an attractive long-term investment avenue. At present, investments in PPF earn an assured return of 8.8% per annum. Not only is the interest tax-free, investments of upto Rs 1 lakh in each financial year are eligible for tax benefits under Section 80C of the Income Tax Act. Maintaining a PPF account isn’t expensive—the minimum investment required to keep the account active is just Rs 500 per financial year. Finally, the investments are backed by a sovereign guarantee ensuring the highest degree of safety for both the sum invested and interest.
3. Start equity investing
If you can take on risk and have a sufficiently long investment horizon, you can consider making equity investment with the bonus monies. It doesn’t hurt that equities provide the best chance to beat inflation over the long haul. If you are a first time investor or don’t have an expert understanding of equities, it would be preferable to opt for the mutual fund route, as you can employ the expertise of a portfolio manager to make investment decisions for you. If you want to avoid investing a large lump sum amount at one go, opt for the systematic investment plan (SIP) or systematic transfer plan (STP) route, wherein investments into equity mutual funds will be spread over a time horizon, and you can benefit from rupee-cost averaging.
4. Set aside a contingency fund for a rainy day
Having a contingency reserve in place is extremely important. An adequate contingency reserve ensures that you can go about with your day-to-day activities even in the event of an unexpected (and unpleasant) situation arising. In effect, it ensures that you don’t have to compromise on your lifestyle, even in difficult times. Make a list of your routine expenses and fixed commitments; follow this up with an estimation of the period for which you wish to cover yourself. This will help you determine the portion of the bonus amount that needs to be set aside as the contingency reserve.
5. Avoid impulsive spending
This is a tip of the ‘avoid’ variety, rather than the ‘do’ kind. Access to disposable funds often makes us vulnerable to go on a binging spree. Resist the temptations and don’t succumb to impulsive spending. Agreed, you have worked hard all year and you deserve to pamper yourself. Hence, allocate a small portion of your bonus amount for some leisure activities, but ensure that the larger chunk is prudently utilised; our recommendation here would be to fulfill the recommendations listed above.
(Senior Research Analyst Vicky Mehta contributed to the writing of this article)
Source : http://goo.gl/pehCi
Vicky Mehta| 06-03-13| Morningstar.in
India’s ‘young’ population is the topic of several discussions and debates. As this sizeable chunk of the population starts earning, it gives rise to higher disposable incomes, needs and aspirations. Expectedly, managing money is a natural corollary. However, the youth as a segment, has its own set of needs and niceties. In keeping with the same, we present five money management tips for young investors.
1. Say no to lazy money
One of the biggest financial blunders is to leave money idle in a savings bank account. Sure, some banks have capitalised on the liberalised regime to offer higher rates than the norm, but that doesn’t justify leaving substantial monies in the bank account. Instead, you should set aside enough money to meet your monthly expenses say for a 6-month period or thereabouts. In effect, this sum can be used to provide for any contingencies that may arise, and the balance monies should be invested.
If you can take on risk, then investing in equity mutual funds via a systematic investment plan is an option. If you would rather just park monies in an alternative avenue, then liquid funds or ultrashort bond funds can be considered. Finally, if your risk appetite doesn’t permit taking on risk, then bank fixed deposits can be apt. Even a combination of the aforementioned options can be considered. While the investment avenues and allocation must be determined based on your risk profile, needs and investment horizon, the key is to make your money work for you.
2. Buy a term plan
With age on your side, buying insurance is unlikely to be a priority for you. Nonetheless, the importance of buying insurance cannot be overstated. Start off with a term plan. A term plan offers insurance in its purest form. Simply put, if an eventuality occurs, then the policy holder’s dependents receive the sum assured; however, if the policy holder survives the tenure of the policy, then no pay out is made.
Since the investment component is missing, a term plan is the cheapest form of availing an insurance cover. Furthermore, given that you are young, the premium amount will be lower now rather than later; also, it certainly helps that the premium amount remains unchanged over the tenure of the policy. Over time, as your needs and obligations change, you can consider adding more policies to your portfolio, but now is as good a time as any, to get started with a term plan.
3. Start a PPF account
Public Provident Fund or PPF as it is popularly referred to, makes for an attractive long-term investment avenue. Presently, investments in PPF earn an assured return of 8.8% per annum. Not only is the interest tax-free, investments of upto Rs 100,000 in each financial year are eligible for tax benefits under Section 80C of the Income Tax Act. Additionally, the investments are backed by a sovereign guarantee ensuring the highest degree of safety for both the sum invested and interest.
Recurring investments (on an annual basis) add an element of discipline to the investment process; the latter coupled with a 15-year investment horizon make PPF an ideal avenue for long-term investing. You can use PPF to provide for long-term goals like buying real estate or retirement. PPF’s appeal is not restricted to just risk-averse investors. For instance, if you are a risk-taking investor, the PPF account can be apt as the stable, assured return component of your portfolio.
4. Use your credit card judiciously
The basic advantages that a credit card offers are common knowledge. However, it is the ancillary benefits that you need to be circumspect about. For instance, it isn’t uncommon for credit card companies to offer a cash limit, which entitles you to withdraw money using the card. Card companies will also offer the option to pay a ‘minimum amount due’ rather than the entire due. Another common feature is to buy gadgets from a retailer who has tied-up with the credit card company; payments can be made using the EMI facility.
However, there is no free lunch in the world of credit cards. Availing the aforementioned facilities comes at a steep price – an exorbitant interest rate. The credit card’s terms and conditions will reveal that cash withdrawals attract an interest rate ranging around 2.5%-3.4% per month. Furthermore, transaction fees are levied as well. Paying only the ‘minimum amount due’ or paying for shopping via the EMI facility can be pricey propositions too. Hence, it is prudent to be disciplined and spend only as much as you can afford to pay for at once. Don’t use the credit card for any extraneous purpose.
5. Become financially literate
Surprised to read this as a money management tip? Don’t be! In India, the investment industry is coming of age. There is a growing breed of investment advisors and financial planners who are equipped to help you manage your finances. You would do well to engage the services of a competent and experienced advisor. That being said, it will certainly help your cause, if you are involved in the process as well – be it evaluating options or choosing between them. This in turn necessitates that you be financially literate.
There are several books, websites and publications that offer information on investing and personal finance. Invest time and effort to educate yourself. The intention is not to become an expert; instead, you should have enough knowledge to be able to make informed decisions. Let’s not forget that making informed decisions is the first step towards achieving financial nirvana.
Source : http://goo.gl/0xPhN
11 FEB, 2013, 10.25AM IST, ET BUREAU
The Public Provident Fund (PPF) may be one of the most popular tax-saving schemes, which can be opened in a post office or designated bank branches, but do you know the investment limit or the withdrawal time frame? Here’s how to familiarise yourself with this investment option.
1) How much is the interest rate?
The interest rate offered on the PPF is no longer fixed, but linked to the market. It is 0.25% above the 10-year government bond yield. This does not mean that the rate will change on a day-to-day basis. It will be announced every year in April, based on the average bond yield in the previous year. For the current financial year, it is 8.8%, but could recede next year. Bond yields have fallen below 8% in recent weeks and the average for 2012-13 has dropped to 8.25%. Analysts don’t expect the PPF rate to be more than 8.5% in 2013-14.
2) How does the interest accrue?
The interest on your PPF balance is compounded annually, but the calculation is done every month. The interest is calculated on the lowest balance between the fifth and last day of every month.
So, if you invest before the 5th, the contribution will earn interest for that month too. Otherwise, it’s like an interest-free loan to the government for a month. If you are investing through a cheque, make sure you deposit it 3-4 days before the cut-off date. If your bank is lethargic in crediting the amount to your PPF account, your investment might miss the deadline.
3) What are the tax benefits?
The PPF corpus is tax-free at all three stages. The investment is eligible for tax deduction under Section 80C. The interest earned is also tax-free, and so are withdrawals. The original draft Direct Taxes Code, introduced in 2010, had proposed withdrawal of tax benefit. Though it would have been with prospective effect and existing investments would have been exempt, there was strong opposition to the move. The revised draft DTC nixed the proposal. However, with P Chidambaram back as finance minister, the original DTC proposals may come back in some form. Make the most of this tax-free opportunity before the rules change.
4) How much can you invest?
The investment limit is Rs 1 lakh in a year through a maximum of 12 instalments. If your minor child has a PPF account, the combined limit for both accounts will be Rs 1 lakh. Don’t invest more than the Rs 1 lakh in a year, because if it is discovered, any interest earned by the excess amount will be reversed. There is also a minimum investment required. An investor has to put in at least Rs 500 in his PPF account in a year. You will be levied a small, but irksome, penalty of Rs 50 if you fail to do so.
5) When does it mature?
A PPF account matures in 15 years, but you can extend the tenure in blocks of five years after maturity. The balance continues to earn interest at the normal rate. The minimum investment of Rs 500 has to be maintained even for accounts extended beyond 15 years. This does not mean your money is locked up for this period. The lock-in period falls with every passing year. In the 14th year, it will only be one year.
If you need money, you can withdraw after the sixth year, but it cannot exceed 50% of the balance at the end of fourth year, or the immediate preceding year, whichever is lower. You can also withdraw only once in a financial year. You can also take a loan against it, but this cannot exceed 25% of the balance in the preceding year. The loan is charged at 2% till 36 months, and 6% for longer tenures. Till a loan is repaid, you can’t take more loans.