If there was one thing that brought cheer on the faces of individuals across the country when the finance minister, Arun Jaitley presented his first budget in July this year, it was the three benefits on the income tax front that had the potential to provide savings of up to Rs 35,000 per annum or close to Rs 3,000 every month on account of tax payments.
Well known as JFM (January February and March) in the banking industry, it is the period is of the year when relationship managers from banks, insurance companies and other distributors approach with investment products that qualify for tax benefits. Tax saving should not be taken up as a crisis management towards the end of the financial year.
It is better to stagger your tax savings over the twelve-month period so that the savings do not become a burden towards the end of the year. However, in case you haven’t, it is time that you plan your savings and invest appropriately over the next three months so as to claim the benefits.
Benefits provided this year
The first announcement came on the exemption front where the finance minister announced that the the exemption limit for individuals would be raised from Rs 2 lakh to Rs 2.5 lakh and for senior citizens from Rs 2.5 lakh to Rs 3 lakh. The move will result into direct savings of Rs 5,000 for all tax payers.
In another major announcement, Jaitley proposed to raise the deduction limit under Section 80C from Rs 1 lakh in the financial year 2013-14 to Rs 1.5 lakh, thereby providing an additional tax savings on Rs 50,000. Individuals falling in the highest tax bracket of 30 per cent will save an additional Rs 15,000 in taxes where as those falling in 10 and 20 per cent marginal tax rate category will save an additional Rs 5,000 and Rs 10,000 respectively. However, to avail the benefit, investors will have to invest Rs 1.5 lakh in investment instruments that qualify for the benefits under Section 80C.
This is not all, as the finance minister has also offered to enhance the benefits that can be availed on the interest component of the home loan monthly payments and increased the deduction limit from Rs 1.5 lakh to Rs 2 lakh, providing additional tax savings on Rs 50,000. While an individual falling in the highest marginal tax bracket will save an additional Rs 15,000 from it, those falling in the lowest tax bracket will save Rs 5,000.
On a aggregate, the three proposals have the potential to allow savings up to Rs 35,000 per annum or up to Rs 2,916 every month.
Start early
It is always better to start investing in tax-related instruments at the beginning of the year as it leads to less burden at the end of the year along with investment gains on the amount invested for that year .
“For those who invest in fixed income instruments like PPF, they should put in the entire amount in April itself as doing so provides you the interest benefit of the same for the entire year. Those looking for equity instruments should do it through 9-12 month systematic investment plan (SIP) beginning April,” said Vishal Dhawan, a Mumbai based financial planner.
For example if you plan to invest Rs 60,000 into equity-linked savings scheme of mutual funds, then if you do so through SIP mode and invest Rs 5,000 over the 12 months and if it grows by 12 per cent then your investment amount would be worth Rs 63,412 by the end of the year. Similarly if you invest Rs 60,000 in PPFs in April itself then in the one year period the investment would have grown to Rs 65,220 at 8.7 per cent. However you will miss on these benefits if you invest towards the end of the financial year.
Best ways to invest
Equities have been the story of the year with the benchmark Sensex at BSE up by 32 per cent over the last one year. Following the surge in equities, the average return generated by the Equity-linked Savings Schemes over the last one year stood at 52 per cent. The best performing tax fund generated a return of 87.5 per cent and the worst performing fund grew by 34.5 per cent, making it as the most lucrative investment destination for tax savings. Even over the past three years the average CAGR of ELSS schemes stood at 27 per cent which is significantly higher than any other asset class in that period including PPF that generates 8.7 per cent per annum. Though past performance of equities is no indicator of future performance, experts feel that equities is a strong 3-year story and it will generate superior returns over the next three to five years. Also, since all tax-related instruments have a lock-in of a minimum of three years, it is a good way to take equity exposure.
“Investors who are comfortable with the risk that comes with equities should go for ELSS however those who do not want to take the full risk of equity can also look at the two pension plans that are being offered by two mutual funds that invest up to 40 per cent in equities and the remaining in debt,” said Dhawan.
Among the ELSS schemes that lead in performance, Reliance Tax Saver comes on top in terms of returns generated over the last one year which stood at 87.5 per cent and IDBI equity advantage with returns of over 72 per cent comes after that.
However, is equity the only way to save for taxes? No, while they outperform on returns front, experts point that taxation benefit should not drive your investment decision rather tax planning should be in the broader framework of meeting your financial goals and the instruments you are comfortable with.
“In case you are conservative and do not want to take risk then go for debt products that qualify for tax benefits,” said Amar Pandit, a Mumbai-based financial planner.
The most commonly used debt instruments are Public Provident Fund (PPF), five-year term deposit with banks that are offering around 8.75 per cent and National Savings Certificate of the post office that is offering 8.5 per cent per annum interest on a five-year deposit.
Investors can now invest up to Rs 1.5 lakh in PPF as the finance minister in his Budget speech also announced to raise the annual investment ceiling in PPF scheme from Rs 1 lakh to Rs 1.5 lakh in line with the hike in investment limit under section under 80C. Conservative investors can utilise this limit for their tax-related savings. While for the salaried class a portion of their investment goes into fixed income through the Employees’ Provident Fund, self-employed individuals can look to take advantage of the increased investment limit in PPF for tax purposes.
Among other ways to save on taxes, first time equity investors can go for Rajiv Gandhi Equity Savings Scheme and investors with salaries of up to Rs 12 lakh can invest in direct equities and claim deduction on Rs 25,000 on the total investment of Rs 50,000 in a year.
