February 29, 2008
Investors can opt several avenues to lighten their tax burden
Lokesh Nathany, National Head (Wealth Management & Portfolio Management Services), Almondz Global Securities has been writing regularly for this website on Equity Linked Saving Schemes (ELSS). He is also a Certified Financial Planner (CFP).
Our web visitors have sent us a series of questions to get answered on tax related issues as the current financial year is coming to an end on March 31, 2008. He took some time from his busy schedule to answer all these queries one by one in detail. Excerpt:
How many ways can a salaried person save on income tax? I mean u/s 80C, 80D etc.?
An effective tax planning can help the salaried individuals to save tax. They can resort to the following avenues to lighten their tax burden:
Sec 24: Interest paid on housing loan to the extent of Rs.1,50,000/- if the loan was taken after April 1, 1999 and Rs.30000 if the loan was taken before April 1, 1999.
Sec 80C: Under Section (u/s) 80C, you can invest up to a maximum of Rs 1 lakh in a variety of schemes like the National Savings Certificate (NSC), Notified bank deposits, Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS) floated by mutual funds, Life Insurance premiums and deferred pension plan.
Sec 80CCC: You can invest within the overall limit as specified u/s 80C in Pension plan of life insurers.
Sec 80D: This section covers Medical Insurance policies taken for self, spouse, dependant parents & children or any member of the Hindu Undivided Family (HUF). The maximum limit is Rs.15,000 and for senior citizens it is Rs.20,000/-. This amount is deducted from the taxable income.
Sec 80 DD: This section covers expenses on medical treatment of a dependant who is a person with disability. The maximum amount allowed is Rs.50,000 or Rs.75,000 for a person with severe disability.
Sec 80 DDB: This section covers expenses on the medical treatment of a specified disease. The maximum amount allowed is Rs 40,000 for persons below the age of 65 and Rs.60,000 if the person is above the age of 65.
Sec 80 E: This covers payment of interest on loan taken for higher studies. The deduction is available only for the interest amount.
Sec 80G: This covers donation to certain funds and charitable institutions. The qualifying amount is 50 or 100% of the donation amount subject to 10% of the gross total income.
Which ELSS would you recommend for Tax Savings and promoted by whom?
The ranking keeps changing everyday. Therefore it is very difficult to pinpoint the clear top performer. I would suggest one can look at SBI, Fidelity, HDFC, DSP, Kotak to name a few who have done well in the recent past.
In ELSS, can I show the amount earned over the year as an amount invested. If I invested Rs 1,000 initially a year back & over the current year I earned Rs 300, so can I show Rs 300 as my investment?
The amount of appreciation cannot be shown as additional investment. If you have chosen dividend reinvestment option and you get units allotted after the dividend is declared, it can be treated as investment and not otherwise.
After how many years tax exemption is available under ELSS? Is tax is payable on the earnings from ELSS after 3 years?
As per the current tax laws, all long-term returns from equity mutual funds are exempted from tax. Since ELSS has 3 years of lock in by default returns are tax free.
Does investment in ELSS give 100% rebate u/s 80C?
The rebate is restricted up to a maximum amount of Rs 1 lakh under the overall limit u/s 80C.
I want to invest in tax saving ELSS through SIP. Which are the best SIPs?
SIP way of investing is only a tool to channelise your investments over a period of time through rupee cost averaging. In terms of which are the best funds to invest in, the ranking keeps changing everyday. Therefore it is very difficult to pinpoint the clear top performer. I would suggest one can look at SBI, Fidelity, HDFC, Kotak to name a few who have done well in recent past.
Which Mutual Fund amongst closed and open ended funds are best in terms of returns irrespective of tax benefits. Further, which mode will give more returns i.e. one time or Systematic Investment Plan (SIP). For investment of Rs 1 lakh, how should one allocate in different MFs (May be SIP/One time/closed/open) & in which MFs?
There is not enough history of close-ended funds barring ELSS to really gauge their performance vis-a-vis open ended funds. In terms of open ended funds, the last couple of years have been extremely good for infrastructure funds. Due to the focus on the crumbling infrastructure in the country, lot of investments are being channelled into this sector. Hence, the great interest of investors in the infrastructure theme.
We expect Indian equity markets to be volatile as they mature. In a volatile market, SIP will always work better then one time investment. Only if the markets are expected to be in a secular bull run with very little volatility, one can look at making one time investment.
One can allocate Rs 1,00,000/- by apportioning investments in various themes like 40% in large cap oriented funds, 30% in mid-cap and 30% in Infrastructure themes.
I want to invest Rs 15,000/- in tax saver plan (one time) for three years. Which one should I go for? SBI Magnum or DSP?
Both have outperformed Bombay Stock Exchange (BSE) Sensex over one year or more time horizon. As I write this on the last one year parameter, DSP has done better.
Both author and website have taken a proper care while providing the above information. However, the investors are advised to consult a financial advisor for their investment decisions. Either author or website will not be responsible for their investment decisions. Read Disclaimer
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