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Tax savings in the face of liquidity crunch

Author: Balwant Jain/Sunday, February 11, 2018/Categories: Tax, Expert View

Tax savings in the face of liquidity crunch

An individual and an HUF (Hindu Undivided Family) can claim deduction under Section 80C upto Rs 1.50 lakh every year for certain items of investment and expenses. Among the various avenues of investments, barring Public Provident Fund (PPF), investment in Equity Linked Savings Scheme (ELSS) and National Savings Certificates (NSC) are the two most popular instruments. ELSS has gained more popularity in recent times due to better returns generated in these investments on the back of  rising stock prices. NSC is  equally popular among the tax payers  as  the investments are risk-free.

The last quarter of the financial year is usually very difficult for tax payers in terms of cash availability  as  investments for tax savings purposes crop up during this period. So, in case you are cash starved, you have a solution in hand if  you have investments in ELSS which have completed three years. Even if you do not have any existing investments in ELSS to recycle, you can take shelter under National Savings Certificates to lessen your cash crunch. Let us discuss both these products in the context of meeting the investment requirement while you are facing  cash crunch.

Recycling your ELSS

The ELSS has a lock in period of three years under the Income Tax Act before which you are not allowed to redeem your investment in ELSS. The maturity proceeds on ELSS are fully exempted from tax  including the  appreciation in the value of your investments. Moreover, the fund house does not charge you any exit load on redemption of the ELSS which is  allowed to be redeemed after three years.

So, the taxpayers who have already completed the mandatory holding period of three years of  ELSS investments, have  an excellent opportunity to avail income tax benefits without  putting in any extra money out of the  pocket.

In case, your investments in the ELSS have already completed the lock-in period of three years but you do not want to redeem them due to certain reasons such as returns generated during the three years period are not as per your expectations, you can just recycle your exiting investment in ELSS without incurring any substantial costs on this account and avail the tax benefits under Section 80 C.

The investments in mutual funds including in ELSS are made in two modes. First is the mode under which the investment is made in lump sum or the second mode, which is more popular among the investors, is through Systematic Investment Plan- popularly known as SIP. Since you do notwant to redeem the existing investments in ELSS and are facing the cash crunch to make future investments in ELSS, you can redeem your existing units in ELSS which have already completed the mandatory lock-in period of three years and simultaneously purchase fresh units of the same scheme from the redemption proceeds at the same NAV (Net Asset Value). This strategy of simultaneous purchase and redemption will ensure that you are able to avail the tax benefits without investing any more amount and that too without timing the market as redemption and purchase are  made at the same price. For SIP, the period of three years is computed with reference to each investment amount  and each SIP is treated as separate investment for counting three years. So in case your investments in ELSS are made through SIP route and only a few instalments have completed the three years mandatory lock in period, you can start another SIP so as to match the redemption and purchase of the units which have already completed the period of 36 months. In case the investments  are made in lump sum and have already completed the holding period of three years, you need to do the redemption and purchase at one go to ensure the continuity of investments without taking risk of fluctuations in the market.

Tax benefit

This benefit of tax rebate can be availed at very nominal costs. The fund houses charge Security Transaction Tax (STT) on the amount of redemption at the rate of 0.01% of the redemption value. Since there is  neither any entry load nor any exit load applicable in such cases, so you can buy and redeem the units at the same price if both the transactions are effected at the same day, which will result in  same Net Asset Value (NAV) being applied  for purchase as well as for redemption. , The reinvestment of your proceeds of redemption in fresh ELSS will entitle you to income tax benefits and help you save tax at the rate applicable to you.

In addition to the cost incurred on account of Security Transaction Tax on redemption of your old units, this methodology does not have any other tax implications.  Presently, all the profits made on units in equity oriented schemes  are exempted under Section 10(38) which have been held for a minimum period of one year or more on the date of transfer. Since you are planning to recycle the units of ELSS after three years as against the requirement of one year, all your capital gains on redemption of existing units will be exempted from tax. Let me point out  that all the investments in ELSS are treated as investments in equity oriented units.

Invest in NSC without investing full money

Here, we will discuss one more financial product available for investment under Section 80 C for tax benefit, which will shield you from the risk associated with  volatility in rate of return. If  you do not have enough funds to invest and  don’t want to commit your money for a longer period, then NSC is ideal for you.

Presently, NSCs have  tenure of five years. The rate of interest is fixed for the entire tenure of five years at the time of issue of such certificates. So, the interest rates are not subject to any fluctuations  in the future. The present rate of interest on NSC is 7.6% for five years which is compounded half yearly. The interest is fixed at the time of issue of the certificate for the whole tenure unlike PPF account where the interest rate will change every quarter and that too on the investments already made in the past as well.

The most attractive feature about NSC is that you can obtain loans from banks against it, which is not available in case of other similar products like tax saving bank fixed deposits with scheduled banks, though both have the same tenure of five years.

In case you are temporarily facing financial crunch to make investments for availing the tax benefits available under Section 80C,  NSC is  best suited to you.  How can you do this?

If you do not have funds now, you can temporarily borrow from your friends or relatives and buy NSCs to the extent of unutilized portion of the deduction available under Section 80C to avail the tax benefits.

The NSCs also offer flexibility with regard to mode of payment. For example,  if you are paying in cash, the certificates are issued immediately. But, if you pay by demand draft or cheque, the certificates are issued on realization of the instrument. Therefore, it is advisable in such case to tender cash and collect the certificates immediately.

Loan on NSCs

Once you have received the certificates from the Post Office, you can approach any scheduled bank, co-operative bank or co-operative credit society to grant you a loan against security of these certificates. It is advisable that you first approach the bank where you have  existing banking relations to ensure faster processing of your loan application. Let me add here that as per the rules governing NSCs, the Post Offices are authorized to mark pledge in favour of scheduled bank, co-operative banks and co-operative societies including cooperative credit societies in addition to certain other entities.

You have to make an application for marking pledge on the National Savings Certificates in favour of the lender which has to be signed by the lender and you both. Once you tender the NSCs together with the application for marking of the pledge, the post office will mark the pledge on the certificates and return the certificates to the bank. On receipt of the NSC duly marked as pledged, the bank will disburse the loan. With this loan money, you can repay the  borrowed amount from your friend or relatives for buying these NSCs. 

There are two options with regard to availing loan against security of the NSCs.  Either, you can take a lump sum loan against NSC and repay it in monthly EMIs or you can obtain an overdraft facility against security of the NSCs. In case, you think your cash flow is erratic, taking an overdraft account lets you have the flexibility to use the funds as and when needed. However, if you feel that you can pay certain sum of money every month, taking a lump sum loan against NSC is advisable. The process for obtaining such loan or overdraft against the NSCs is quite simple and is also not expensive.

The banks normally grant a loan upto 80% to 85% of the face value of the NSCs and the rate of interest charged on the loan against NSC certificate or overdrafts is very competitive and is substantially lower than the rate charged on personal loans. The rate of interest is normally 1% to 2% higher than the rate of interest on applicable of NSC. However, this varies from bank to bank. In addition to the above interest, you will have to pay one time processing charges of around  1% of the amount sanctioned. Generally, there are no prepayment charges on loan taken against NSC.

So, your existing ELSS and fresh investment in NSC can help you tide over your temporary cash crunch problem and let you avail the tax benefits.

The author is a CA, CS and CFPCM. He can be reached at

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Balwant Jain
Balwant Jain

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