Follow Us :
Market Snapshot
INDIAGLOBAL
BSE Sensex 28458.10 -104.72 (-0.37)
NIFTY 8538.30 -26.10 (-0.30)
The Finapolis Poll
Are steps being taken by the government on the black money issue enough?
Please answer this simple math question 4+3 =
Subscribe
The Chartist
[imgleftbottom] Private Equity (PE) investors have been credited with nurturing and scaling Indian companies
Trading Calls
Company Analyst Recommendations
SIEMENS Karvy LONG
WockPha Karvy LONG
TataCom Karvy SHORT
SUNTV Karvy LONG
TVSMOTOR Karvy LONG
Click Here for More Research Calls
Stock Split We all come across financial issues that sound Greek. Here is The Finapolis translating Stock Split for you...
Expert Speak
Don’t Miss The Additional Bonanza
By AN Shanbhag and Sandeep Shanbhag      | Nov 2014
Jump to comments (0)

As most readers would be aware, the recent Budget 2014 has raised the limit on investments eligible for deduction under the umbrella of Sec. 80CCE covering Sec. 80C, 80CCC and 80CCD from Rs. 1 lakh to Rs. 1.50 lakh w.e.f. FY 14-15. Consequently, the ceiling on contribution to PPF during any FY has been correspondingly raised from Rs. 1,00,000 to Rs. 1,50,000. 

This article deals with providing answers to queries related with this amendment that we routinely receive from readers by way of emails. 

I belong to the lowest tax bracket of 10.3%. Is this amendment useful to me? 

Against every Rs. 100 you contribute to the scheme you save tax of Rs. 10.30. In other words, your effective contribution is Rs. 89.70. Now, take the PPF tax-free interest of 8.7% as your bench mark. So basically, you are earning Rs. 8.70 on your investment of Rs. 89.70. The equivalent rate of interest works out at 9.7% tax-free (= (8.7 / 89.70) x 100). 

There is an additional advantage. Your out-of-pocket investment is Rs. 89.70 but at the end of term of the scheme, you get back Rs. 100. If you take the 3-year lock-in period of Equity-linked Savings Scheme as your benchmark, the returns work out at 3.69% (= ((100 / 89.70)(1/3)  -1) x 100). 

The total is 13.39% (= 9.7 + 3.69). Actually, the two streams are not additive. The approximate figure works out to around 13.18%. Of course, here you assume that the return from the ELSS fund would be 8.7% p.a. In actuality, it could be more or less. Corresponding rate of return in the case of 20.6% tax zone is 18.21% and for 30.9% zone it is 24.52%. 

And most importantly, this is tax-free.

The extra contribution of Rs. 30,000 (making the total Rs. 1 lakh) gets me out of the tax net totally. Should I contribute more?     

Yes. You will not get any deduction but certainly get as high as 9.81% tax-free returns, from such a safe source. This, by itself, is quite attractive. Go ahead if you have enough liquidity. 

You have mentioned PPF as well as ELSS. How about 5-year Bank FDs?

The advantage of the deduction reduces drastically as the term increases. We have seen that in the rate is 3.69% when the term is 3 years. For a term of 5 years, it descends down at 2.19% (= ((100 / 89.70)(1/5) -1) x 100).   

Moreover, shorter term leaves more liquidity in your hands. Again, the interest on bank FDs is fully taxable. 

Therefore, tax saving bank FDs as also National Savings Certificates – VIII, Post Office Time Deposits and Senior Citizens Savings Scheme, all of which have term of 5 years and the interest received or receivable is fully taxable aren’t so advantageous as ELSS or PPF. 

Interest on the 5-yr NSC-VIII is eligible for the deduction u/s 80C. Does this make it superior to PPF?

The fact that the NSC interest occupies space of 80C deductions is not as much helpful as it is perceived to be. It is always better to get clean interest without any attached benefits. This gives the investor an opportunity to park it anywhere, including the very scheme which paid the interest. You should avoid schemes which preempt your action if a parallel scheme without any preemption is available. 

How about Life Insurance?

Never buy life insurance just because it offers tax deduction. One should buy a life insurance policy only for the protection of one’s near and dear ones. Do not touch it if there is no one dependant upon you. And even if some one is dependent, but already well provided for, do not buy the policy. If you find that you do need a policy, buy term insurance to the extent you need the cover. Do not make the mistake of over insuring yourself.

What is the Term of PPF?

Though on paper its term is 16 years, in practice it is much less.  The withdrawal facility of PPF begins from 7th year onwards. If you deposit some fixed amount, say Rs. 1,50,000 for the initial 6 years, you will be able to withdraw and redeposit Rs. 1,50,000 from 7th year onwards, every year in future. You will earn the benefit of the deduction without dipping your hand in your pocket. 

That leaves us with only PPF and ELSS. Which one?

PPF is more popular than ELSS because its interest is assured at 8.7%. Yes, it changes from year to year but, unlike ELSS, it is not subject to any market volatility. Moreover, after a holding period of 6 years, the liquidity of PPF is unparalleled. During its term of 3 years, ELSS can neither be encashed nor a loan be taken against its security. However, the return on ELSS could be potentially much higher than PPF. For example, currently, the average 5-year annual return on ELSS funds is in the region of 14% p.a. whereas the average 3-year annual return is around 19% p.a. 

To Conclude

Depending upon your risk profile, you may opt for either PPF or ELSS or a combination of both. Basically, the article points out that – a. the extra Rs. 50,000 Sec. 80C limit is like a bonanza that investors should grab with both hands and b. in the plethora of instruments under Sec. 80C, PPF and ELSS are the best bets. Investing in these is like saving tax and getting paid for it. So do make hay while the sun shines! 

-----------------------------------------------

The authors are leading financial advisors. Write to them at [email protected]

 

TAGS:
Click here to go to another columnist
Comments
[imgrighttop]
Columnists
Mohamed A. El-Erian
The Return of the Dollar
Alam Srinivas
Curious Case Of School Dropouts
AN Shanbhag and Sandeep Shanbhag
Tips to Make Your Tax Return Error Free
Santhosh Kumar
Modi Effect on Mumbai and Gurgaon
More Columnists [ + ]
Get all your personal finance queries answered by The Personal Finance Advisor
[+ more]
The Finapolis Conversation
Planning To Expand Beyond Borders: GS Sundararajan, Group Director, Shriram Group
[+ more]
Financial planning of a 27 year old executive
[+ more]
Sachin Aur Arjun

Copyright © 2014. All rights reserved. theFinapolis.com Privacy Policy | Careers | Contact Us | Sitemap