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- Ten tax saving investment options
- LIFE INSURANCE PREMIUM - Tax Saving
- Know the alpha, beta of your mutual fund returns
| Ten tax saving investment options Posted: 17 Jan 2013 03:10 AM PST
As the fiscal end comes closer, it is time for investing to save tax.
Apart from the regular investment options under Section 80C of the income tax act, this year investors have an added advantage of investing in infrastructure bonds and enjoy an additional deduction in tax under section 80CCF of the Income Tax Act.
SECTION 80C DEDUCTIONS: Investment options under Section 80C can be broadly categorised as market linked, fixed income and insurance. The fixed income category includes investment options such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving bank fixed deposits, National Savings Certificate (NSC) and senior citizens savings schemes. While it is the most popular tax saving category, market-linked instruments including tax-saving equity mutual funds (ELSS) and unitlinked insurance plans (ULIPs) are gradually catching up.
PUBLIC PROVIDENT FUND (PPF): One of the oldest investment options, PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exemptexempt-exempt) tax regime. This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax. PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to Rs 70,000 a year and mandatory investment tenure of 15 years. An investment of Rs 70,000 every year in PPF for 15 years will amount to a taxfree maturity sum of Rs 20.5 lakh at the end of the 15 year tenure.
EMPLOYEE PROVIDENT FUND (EPF): Under the current norms, 12% of the employee's salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of Rs 1 lakh per annum. Like PPF, EPF, also falls under the EEE tax regime wherein the interest received (on retirement from service) is tax-free in the hands of the investor. The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO). After having maintained a steady interest rate of 8.5% per annum for quite some time, the EPFO has enhanced the rate of interest to 9.5% for the financial year 2010-11. While it is still not sure whether such an attractive interest rate will continue in the following years, those who have been contributing to EPF for quite some time now and have accumulated a large corpus are bound to benefit immensely with this year's higher interest as interest is compounded annually.
NATIONAL SAVINGS CERTIFICATE: Similar to PPF, NSC also earns an interest rate of 8% per annum and investment up to Rs 1 lakh is exempt from tax under section 80C. However, unlike PPF, interest received on NSC, at the time of maturity, is taxable in the hands of the investor which makes it comparatively less attractive. On the positive note, however, NSC has a relatively shorter lock-in period of just about 6 years and the interest here is compounded halfyearly. Thus, every Rs 100 invested into NSC will grow to Rs 160.10 on maturity.
TAX SAVING BANK FDS: Investment up to Rs 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. These fixed deposits mandate a lock-in period of five years and interest is compounded quarterly, just like any other ordinary bank fixed deposit. The drawback is taxability of interest income upon maturity. As most banks are currently offering attractive interest rates, tax-saving bank fixed deposits are currently offering interest rates as high as 8.5% to its investors.
SENIOR CITIZENS SAVING SCHEME: Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme, which offers a fairly attractive interest rate of 9% a year, payable on quarterly basis. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor.
EQUITY LINKED SAVINGS SCHEME (ELSS): These tax saving mutual fund schemes do carry an embedded market risk and calls for investor prudence before making an investment decision. However, their returns are equally rewarding and tax free in the hands of the investor. As ELSS has a mandatory lock-in period of three years, they are positioned as long-term equity assets and thus returns are taxfree in the hands of the investor. And though these schemes mandate a threeyear lock-in period, investors are likely to be better off if they continue to stay invested for a longer term as equities generate best returns over a longer time frame. For instance, on an average, ELSS category of funds has returned about 22% compounded (CAGR) returns per annum over the past 10 year period. Some of the better performing schemes in this category include Canara Robeco Equity Tax Saver, Fidelity Tax Advantage and HDFC Taxsaver for investors to choose from. LIFE INSURANCE PREMIUM: Any premium payable by an investor to provide cover to his life is also eligible for deduction under Section 80C, subject to a maximum of Rs 1 lakh. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry. Investors should, however, make sure that premium payable is not more than 20% of the sum assured (amount of life cover) in order to avail Section 80C deduction.
UNIT LINKED INSURANCE PLANS (ULIPS): Ulips, or marketlinked insurance schemes, are also eligible for deduction under Section 80C. As these schemes provide investors the benefit of both life cover and investment in equity and debt markets, these are highly popular with investors. Investors would, however, do well to check the premiums charged by these schemes before making an investment decision as most Ulips charge high premiums.
SECTION 80CCF DEDUCTION: A new Section 80CCF has been inserted in the Finance Bill 2010-11, which provides an additional deduction of Rs 20,000 to investors for investing in infrastructure bonds issued by notified organisations. This deduction is over and above the Rs 100,000 deduction available under Section 80C. In the latest tranche, infrastructure bonds offer an attractive interest rate of about 8% to investors with a minimum lock-in period of five years. Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
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Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Download Mutual Fund Application Forms from all AMCs Download Mutual Fund Application Forms Best Performing Mutual Funds
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| LIFE INSURANCE PREMIUM - Tax Saving Posted: 17 Jan 2013 02:02 AM PST Any premium payable by an investor to provide cover to his life is also eligible for deduction under Section 80C, subject to a maximum of Rs 1 lakh. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry. Investors should, however, make sure that premium payable is not more than 20% of the sum assured (amount of life cover) in order to avail Section 80C deduction. Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
Happy Investing!!
We can help. Call 0 94 8300 8300 (India)
Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Download Mutual Fund Application Forms from all AMCs Download Mutual Fund Application Forms Best Performing Mutual Funds
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| Know the alpha, beta of your mutual fund returns Posted: 17 Jan 2013 01:36 AM PST Call 0 94 8300 8300 (India) RETURNS yielded by your investments in mutual funds are very important. However, knowledge about how to read and interpret that data is more important, because future decisions may be based on these numbers and if you read something other than what it is supposed to convey, it may influence your decisions in the wrong way. Let us make a beginning in deciphering mutual fund returns.
For example, if an equity fund has yielded three per cent over three months, simple annualisation implies 12 per cent, but returns over the next nine months may be much higher or much lower so as to make the returns over the entire year something very different from 12 per cent.
To give an example, if a debt fund has given five per cent return over six months, it would be expressed as 10 per cent. If it were compound annualised (it is not, just for the sake of awareness) it would have been expressed as 10.25 per cent. If you are not aware that the return of 10 per cent is annualised, you would perceive that it has given absolute 10 per cent over six months. If a debt fund has given 30 per cent return over three years (a period more than one year), since it is compound annualised, it is not expressed as 10 per cent per year, but as 9.14 per cent per year.
For example, let us assume the risk free rate as seven per cent (yield on one-year treasury bill), the return over the period as 12 per cent and the standard deviation of returns over the period as 0.3. Then the sharpe ratio is (12-7)/0.3= 0.167. If another fund has given 10 per cent return over the period with a standard deviation of 0.15, its sharpe ratio is (107)/0.15 = 0.2, hence it has performed better than the previous fund.
It is measured as: Jensen's Alpha = portfolio return [risk free rate + portfolio beta * (market return risk free rate)]. Portfolio beta means the extent to which it follows market returns. The investor may not have the data to calculate sharpe ratio or alpha for himself, but the number as such may be published by the AMC in the factsheet. With awareness of the various measures to calculate risk-adjusted returns, he would be better placed to understand the implications. A simple search on the internet would reveal the definition of any term in the AMC literature which is not known to the investor.
Happy Investing!!
We can help. Call 0 94 8300 8300 (India)
Leave your comment with mail ID and we will answer them
OR
You can write back to us at PrajnaCapital [at] Gmail [dot] Com
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Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs
Download Mutual Fund Application Forms
Best Performing Mutual Funds
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