Confused
about the heading of this article…
What is
the biggest mistake people commit in the month of March???
The
first financial agent to knock on your door in March gets to sell any damn financial
product to you.
Any
damn financial product with any amount of commission and expenses?
And
all his hefty commission and his company’s expenses go from whose pocket?
Obviously
from your pocket…
So why do you commit this hara-kiri? (Hara-kiri is a Japanese term
for Suicide done in a violent fashion)
Because
of the following reasons:
- 1. It is March and just like all previous years, you just could not manage to get hold of a good Financial Advisor who can help plan your tax saving investments (What, do you really think you do not need professional help to decide where to Invest that 1 lac every year?)
- 2. Your CA had strictly instructed you last time to invest in some or the other financial product under sec 80C of The Income Tax Act if you want to save on taxes
- 3. Since you have not planned anything and its fag end of March, the financial or commission agent who has come knocking at the door has been god sent. Or that’s what you think…
So, just like all previous
years, you end up buying an unwanted, undesirable, expensive financial product
not because you wanted to buy the same but because it is March and the Income
Tax Act requires you to invest up to Rs. 1 lac each year to save tax….
And if it happens to
be an Insurance product (which would be the case more often than not), then you
have promised commitments for not only this year but for the next 5, 10 or even
15 years…
So you buy an
insurance product and if you are very unlucky, the commission agent’s favourite
insurance product, a Unit Linked Insurance Plan (ULIP) to save tax this year but
knowingly or unknowingly you have bought an insurance plan on which you will
have to pay hefty Insurance premium for the next 5 to 10 or even 15 years. And you
are not even sure whether you need this product in the first place….
So what is the
solution…?
Can I manage to teach you
about the various Investment avenues available to us under Sec 80C of the
Income Tax Act 1961 and help you to pick the right product for yourself?
Well, if you promise
me that you will read this article properly and the links provided, I can at
least attempt to make you understand the pros and cons of various tax saving avenues…
Well let us start then…
To begin with, since I
have already written a lot on Tax Saving Investment previously, and since till
date not much has changed in the Income Tax laws pertaining to Sec 80C, I would
insist that you go through my previous articles on this subject by clicking on
the links below:
Read
the following 3 articles on my BLOG and return here:
|
No.
|
Article Heading
|
Link to the article
|
|
1
|
Death
and Taxes
|
|
|
2
|
4
Strong Reasons to Invest in Tax Saving Mutual Funds
|
|
|
3
|
Tax
Saving Mutual Funds: Grab them with both hands
|
The first article,
titled “Death & Taxes” helps you
to break various Tax Planning Myths and introduces you to various Investing
options available u/s 80C:
Tax planning myths
·
I
invest only to save tax
·
I buy
Insurance only because I need to save taxes
·
PPF /
NSC are still the best tax planning instruments available
·
Unit
Linked Insurance Plan's (ULIPs) are good for tax planning & give great
returns too
·
Rs.
100,000 is the maximum I can invest to save taxes
·
Repayment
of loans do not qualify for any tax deduction
·
Tax
planning needs to be done only at the end of the year around Jan-March
The right approach Tax planning investments
have to be planned in a way that it helps you create WEALTH and in
the process help you reduce your tax liability. Further, your risk taking
capacity & asset allocation should decide what tax planning instrument
you choose. Last minute rush to buy insurance or investing in PPF disregarding
your actual needs is not the right approach towards tax planning. A good
financial advisor can help you decide on the right tax planning instruments for
you based on your financial goals.
The
second article titled “4 Strong
Reasons to Invest in Tax Saving Mutual Funds” introduces you to the
merits of investing in Tax Saving Mutual Funds or Equity Linked Savings Scheme
(ELSS) as they are commonly known, which according to me, is one of the best
tax saving investment available to us u/s 80C of The Income Tax Act…
Why,
because it has following advantages...
Merits
of Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS):
- Tax Saving Mutual Funds, also known as ELSS, have minimum lock-in period of 3 years compared to any other tax saving avenue; PPF has 6 yrs, NSC has 5 years, ULIP has 5 years, Bank FD has 5 years etc…
- It is one of the few marked-linked (investment in stock market) Investment avenue available under sec 80C and much better than the other market-linked product like ULIP
- You only have to Invest once in this product and there is no binding on you to continue investing for a few years in the future which is the case with practically all other Sec 80C products; what a relief! It works like a Single Premium insurance plan…
- It has amongst the best returns as returns are linked to market and over a longer time frame, Tax Saving Mutual Funds have usually given double digit returns, post tax, post expenses…
- Also, after the abolition of entry load on Mutual Funds, weft Sep 1, 2009, the commission on this product is zero and the expenses ratio is also minimal in the range of 1 to 2% per annum…
- Most important, the returns from Tax Saving Products are tax free….yes, the Long Term Capital Gains or ELSS is tax free as per the current law…
What more
do you want from a Tax Saving Investment avenue?
No long term commitment,
onetime payment only, zero commissions and minimal expenses, minimum lock-in
period of 3 years and tax free double digit returns…
Well,
you are a very greedy person, if you are demanding something more from a tax
saving product then what an ELSS is already offering you…
Now,
it is known that in the coming budget, The Income Tax Act 1961, in all
probabilities will get replaced with the Direct Tax Code… if that happens, the
tax planning game will change completely.
However,
that will have effect next financial year (FY 2012-13) and will not have any
impact whatsoever this financial year or your tax planning strategy for this
year (FY 2011-12). Also, it is likely that this might be the last year for Tax
Saving Mutual Funds or ELSS. In all likelihood, ELSS will cease to exist under
the DTC regime. (Although I wish this should not happen). If that is the case,
this is the last year when you can invest in this wonderful Investment &
tax saving avenue…
So
please grab Tax Saving Mutual Funds or ELSS with both hands and after Home Loan
Principal amount and Term Insurance premier and PPF/EPF/GPF, every penny left
u/s 80C out of Rs. 1 lac should go into ELSS or Tax Saving Mutual Funds…
Yes,
one caveat here, there are more than 35 Tax Saving Mutual Funds or ELSS schemes
out there in the market. And you should be investing in the top 1 or 2 schemes.
Which are these?
Well,
you have 2 options:
- Consult your Financial Advisor or Financial Planner (not the commission agent, I hope you know the difference by now) OR
- Read my BLOG regularly…
Plan
your taxes wisely…
I
am closing this article with Chanakya’s quote on Taxation…
According
to Chanakya, “a King should collect Tax like a bee collects nectar from flower,
without harming the flower and collecting only that much nectar from a flower
as is necessary and without harming the flower so that it can come again to
collect the nectar from the flower next season”…
Wise words
from one of the wisest political minds India has seen…Hope our beloved pranab
da is listening and has read Chanakya’s Arthashastra…
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