Saturday, January 7, 2017

5 things one must consider before making fresh Section 80C investment for FY 2016-17

Courtesy : Economic Times



The fag end of the financial year is when we scurry around and grapple with bewildering alphanumeric combinations like Section 80C and 80DD. If your tax-saving efforts are last minute the chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, many people try to   make tax saving investments at the last minute.

Here is how you can do last-minute tax planning to not only reduce your tax liability, but also save towards the goals you have set at different life stages.

While choosing the right tax-saver, base your decision on these five important things, among others:
*How much deduction from gross total income can you avail
*The amount of fresh tax-saving investments you need to make
*Kind of tax-saving instrument you should invest in
*Tenure of the investment
*Taxability of income from the investment

Once you have got a fix on these, equally important is to choose a tax-saving instrument which can be linked to a specific goal .
How much deduction can you avail
Section 80C allows deduction from gross total income (before arriving at taxable income) of up to Rs 1.5 lakh per annum on one or more eligible investments and specified expenses. The eligible investments include life insurance, Equity Linked Savings Schemes (ELSS) mutual funds, Public Provident Fund (PPF), National Savings Certificate (NSC), etc., while expenses and outflows can include tuition fees, principal repayment of home loan, among others.
If you have exhausted your annual limit Sec 80C limit of Rs 1.5 lakh, you can also look at National Pension System (NPS) to save towards retirement and, in the process, save additional tax.

From 2015-16 onwards, an additional (additional to Section 80C) deduction of up to Rs 50,000 under Section 80CCD (1b) for investment in NPS is also possible. For someone in the highest 30 per cent income tax bracket, it's an additional annual saving of about Rs 15,000.

Further, the premium paid towards a health insurance plan for self and family members qualifies for tax benefit under Section 80D for Rs 25,000 and Rs 30,000 for those above 60. If one has a home loan, interest payments made towards its repayment can also be claimed under Section 24 of the Income Tax Act. The other deductions include donations under Section 80G, interest payments under Section 80E for education loan, etc.

Fresh investments you need to make
Before you start looking for the right tax saver, run this simple exercise to evaluate whether you actually need to make any fresh investments for this financial year (2016-17).

Non-Section 80C deductions: First, look at all non-Section 80C deductions like the interest paid on home loan, health plans, educational loan.
Section 80C outflows: Then consider Section 80C-related  expenses like children's tuition fees, principal repayment on home loan, pure term life insurance plans premiums.
Existing Section 80C commitments: Consider all the existing Section 80C commitments to invest/to pay premium such as in Employees' Provident Fund (EPF) and endowment life insurance, respectively

The exercise above gives you a total of existing commitments under Section 80C, 80D and other deductions. Now, from your gross total income, reduce the amount to arrive at the taxable income.

If your net income after doing the above calculation is still above the tax exemption limit of Rs 2.5 lakh then you need to look at further tax saving. To reduce taxable income further and provided the limit of section 80C isn't yet exhausted, look for the right Section 80C investments.
Kind of tax-saving instrument
Within the basket of Section 80C investments, there are two options to choose from: Investments offering "Fixed and assured returns" and those offering "market-linked returns".

The former primarily includes debt assets, including notified bank deposits with a minimum period of five years, endowment life insurance plans, PPF, NSC, Senior Citizens Savings Scheme (SCSC), etc. The returns are fixed for the entire duration and and generally in line with the rates prevalent in the economy and very close to inflation figure. They suit conservative investors whose aim is to preserve capital rather than create wealth.

The 'market-linked returns' category is primarily the equity-asset class. Here, one can choose from ELSS of mutual funds and Unit-Linked Insurance Plan (ULIP), pension plans and the NPS. The returns are not assured but linked to the performance of the underlying assets such as equity or debt.  They have the potential to generate higher inflation adjusted return in the long run to the extent they are based on the equity asset class.
Tenure
All the above tax-saving instruments, by nature, are medium to long term products: From a three-year lock-in that comes with ELSS to a 15-year lock-in of PPF. Some like life insurance require annual payments to be made for a longer duration.

Taxability of income
Another important factor to consider is the post-tax return of the tax-saving investment. For instance, most fixed and assured returns products such as NSC provide you with Section 80C benefits, but the returns, currently 8 per cent (five-year) annually, are taxable. This makes the effective post-tax return equal to 5.52 per cent for the highest taxpayers. Considering the annual inflation of six per cent, the real return is almost zero!

Of all the tax-saving tools, only PPF, EPF, ELSS and insurance plans enjoy the EEE status, i.e., the growth is tax-exempt during the three stages of investing, growth and withdrawal.

Making the right choice
First, identify your medium and long term goals. A market-linked equity-backed tax-saving instrument is good for long term goals as equities need time to perform. And, before considering a taxable investment, see the tax rate that applies to you and consider the post-tax return. A low post-tax return after adjusting for inflation will not help you in achieving your goals in the long run. Inflation erodes the purchasing power of money, especially  
over long term.

Conclusion
Tax planning should ideally begin at the start of every financial year. Remember, the risks of planning tax-saving in a hurry later are manifold. There is, for instance, a high probability of picking up an unsuitable product. Also, there isn't any one instrument that can help you save tax and at the same time also provide safe, assured and highest return. Your final choice should ideally be based on a gamut of factors rather than solely being driven by returns from the financial product.

The fag end of the financial year is when we scurry around and grapple with bewildering alphanumeric combinations like Section 80C and 80DD. If your tax-saving efforts are last minute the chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, many people try to  ..

The fag end of the financial year is when we scurry around and grapple with bewildering alphanumeric combinations like Section 80C and 80DD. If your tax-saving efforts are last minute the chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, many people try to  ..

37 comments :

  1. Hotel leela and karur vysya bank any advice

    ReplyDelete
  2. Sir, u r views on Aries agro and jain irrigation

    ReplyDelete
  3. Sir please Share your view of Sicagen India, Kwality Diary and Shrenuj and company

    ReplyDelete
  4. Dear VP ji ,we are in very sad situation due to non of ur recommendations. try to give some clues like your previous GTS .can you share your view on asian oil field & cosboard industries

    ReplyDelete
  5. Thanks sir fr article..

    Any view on Dhunseri tea, mcleod russel, rossel india, harrison malaya??

    Regards
    Arjeet

    ReplyDelete
    Replies
    1. Tracking only Goodricke group from this sector.

      Delete
  6. Dhananjay BaranwalJanuary 8, 2017 at 8:34 AM

    Informative article on appropriate time.Mostly people do last hour effort to invest in these type of instruments.However ELSS is the best instrument under section 80 c.

    ReplyDelete
  7. Sir, Thanks for the valuable information.

    ReplyDelete
  8. Thankyou Sir, how good one is at tax saving, one still need to go through an article like this. Good one.
    Could you please share your view on Geojit BNP after aquairing Sharekhan?

    ReplyDelete
  9. Sir Yur valueable words for ducon infratech. ...is this a good business to explore. ...yur views

    ReplyDelete
    Replies
    1. To be merged company in an industry with good potential , rest depends on company's execution capabilities

      Delete
  10. Sir, please comment on Godavari drugs. Do we need more patience and give some more time to the company

    ReplyDelete
    Replies
    1. Since the proposed expansion delayed , already suggested to shift.

      Delete
  11. The best option is PPF as it is tax free at every angle.

    ReplyDelete
  12. Sir your View on Amulya Leasing after the recent run up and also if u track Asian Oilfield..as there seems to be management change in future.

    ReplyDelete
    Replies
    1. Positive on both but don't expect rocket like move .

      Delete
  13. Dear sir your views on cosboard and bansal roofings?

    ReplyDelete
  14. Dear vp ji
    Please shae your views on shrenuj & co, kushal trade.
    Thanks in advance.

    ReplyDelete
  15. Dear Sir, kindly Share your views about ifb agro., does it have multibagger potential ...

    ReplyDelete
  16. Sir
    Your views on Sarda Energy and Minerals and also GHCL

    ReplyDelete
  17. Hello VP sir,please do give your views about gulf petroleums,ak capital,fortune finserve,and adifinchem on the basis of January 10 s price for long term basis?

    ReplyDelete
  18. Please let me know your view about Kwality diary,

    ReplyDelete
  19. Sir your views on Engineers India, DCM Shriram Inds and Omkar Speciality. Thanks

    ReplyDelete
  20. Hello Sir,
    Please share your views on coromandel International? This stock has actually hit a new 52-week high today. Whats the reason behind this?

    ReplyDelete
  21. Hi VP Sir, Please share your views on growth prospects of Jet freight logistics trading in NSE SME segment.

    ReplyDelete
  22. Hi vp ji, ur views on mangalam drugs, thanks....

    ReplyDelete
  23. Sir ur view on cosboard industries

    ReplyDelete
  24. Dear sir
    Atlanta limited showing biz improvement , order book. Its a worth one to invest at cmp?

    ReplyDelete
  25. Sir your view on voltamp

    ReplyDelete
  26. Sir, your view on himatsingka seide Ltd.

    ReplyDelete
  27. Sir, what's your take on Makers lab?

    ReplyDelete
  28. Sir your views on wonderla and ghcl

    ReplyDelete
  29. Sir..
    What is your call on Shree pushkar chemicals at Rs 190 and Omkar specialities at Rs 160 ..is it a buy hold or sell

    ReplyDelete
  30. Sir, What is your view on Caplin(expecting new manufacturing unit for US) and MIC electronics( Got a patent for Solar Rechargeable Led Lantern)

    ReplyDelete
  31. Hello sir, What is your view old pick Bambino agro at cmp.Thanks.

    ReplyDelete

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