4 best tips for tax savings instruments.
It’s has been written several times in newspapers including truly yours about tax planning and why people should invest in April not in the last quarter. But by and large individual needs a reminded from their HR that if you don’t invest X amount there will be tax deduction from next month salary.
As herd mentality, we all run to invest in some tax savings instruments without understanding much about it. Yet another tax season at least this year we will understand few important points before we invest.
PPF: It’s for the conservative investors. It’s best suited for long term investors and it guarantees returns. The capital in a PPF account is completely protected as the scheme is backed by the government of India. Interest rate on this deposit will be notified before April 1 of the relevant financial year.Cuurently the interest rate on PPF deposits is 8.8 per cent. The minimum and maximum investment is Rs 500 and Rs 1 lakh per annum respectively. The tenure is 15 years.
Point to remember: PPF interest rates are not fixed and it will change according the market dynamic.
Insurance: Gone are the days individual buy insurance as protection product. With introduction of Ulips,its has become more of investment product rather than the insurance. Thanks to the noise created by the media now everyone knows about the product. But there is always a misconception about the product. There is nothing wrong about the product, but either it’s sold without revealing more information or people think it’s a short- term product. But if one wants to enjoy the benefit of the product, they should stay invested atleast for ten years.
Any insurance product if you discontinue in the middle it’s just like running away from Operation Theater.
Ulips is more transparent product with lot of facility but it has not got due credit because its mis- sold.
The basic features are
Five year lock-in. Individual can select the sum insured based on their premium paying capacity.Switch facility in Ulips is the strength of the product but in India very few per cent of the policyholders use that to its best.
Points to remember: It is far superior to the traditional insurance product even though the investment risk is borne by the investors.
ELSS: It’s one of the best inflation beating investments along with the tax benefit. Among all the investment products, it has low lock-in period. Although it has delivered mind boggling one year average return of 32 per cent, over the three year period its has clocked only 6.3 per cent. With economy is under recovery it may come out of its dark days and it might reward investors.
Over the years most of the schemes slowly moved their assets to large cap stocks and it helped the schemes to contain volatility in the performance.
The maximum one can investment for tax benefit is Rs 1 lakh.
Point to remember:In ELSS, its better to buy in lump sum mode. Systematic investment plan is one of the best ways of investing in equity mutual fund schemes but when you follow the same logic in ELSS fund your lock-in period will be three years from the date of respective investment.
Hence while investing in ELSS don’t opt for dividend re-investment because your dividend will also be locked for
three years.
Bank deposits: The major advantage of the investment is that the interest rate is fixed unlike a floater in PPF.The deposits up to Rs 1 lakh is covered by deposit insurance hence there is no fear of losing money even if you Invest in any lower rating banks. The lock-in period is for five years hence there is no re- investment risk.However,its has to be reminded that interest earned on the deposits are taxable based on the income slab.
Points to remember: Interest earned on deposits are taxable.
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