The hike in the deduction limit under Section 80C means that a taxpayer can reduce his tax by up to Rs 15,000. But the higher limit may not be of much use if you don't know which tax-saving option suits you best. ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here's a look at these eight instruments.
There are compelling reasons why ELSS funds should be part of the Returns equity allocation in a taxpayer's 27.34 % investment portfolio in 2015. They in past three may be low on safety but they years score full points on all other parameters. The returns are high, the income is tax free, the investor is free to alter the time and amount of investment, the lock-in of 3 years is the shortest among all tax saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option and the cost is even lower if you go for the direct plans of these funds.Smart tip: Invest in the dividend option which acts as a profit-booking mechanism and also gives you liquidity. Dividends are tax-free.
For a lot of people, Ulip is still a fourletter word. However, investors need to wake up to the new reality.
An ordinary Ulip is still a costly proposition for the buyer. But the online avatar of these marketlinked insurance plans is a low-cost option far removed from what was missold to investors a few years ago. The Click2Invest plan from HDFC Life, for instance, charges only 1.35% a year for fund management. Ulips can be used as a rebalancing tool by the savvy investor. He can switch from equity to debt and vice versa, without any tax implication. Buy a Ulip only if you can pay the premiums for the full term. Also, take a plan for at least 15 years. A short-term plan may not be able to recover the high charges levied in the initial years.
Smart tip: Don't invest in the equity fund at one go.
Invest in a liquid fund and then shift small amounts to equity fund.
Budget 2014 also hiked the annual investment limit in the PPF. Risk Returns averse investors can now sock 8.7 % away more in the ultra-safe for 2014-15 scheme. The PPF scores high on safety, taxability and costs, but re turns are not so attractive and li quidity is not very high. The scheme will give 8.7% this year but don't count on this in the following years. The interest rate on small savings schemes such as the PPF is linked to the government bond yield and is likely to come down in the coming years.Smart tip: Open a PPF account in a bank that allows online access. It will reduce the effort.
SR CITIZENS' SAVING SCHEME
The Senior Citizens' Sav Returns ing Scheme (SCSS) is an ideal tax saving option for senior citizens 9.2 % above 60. The money is safe and the for 2014-15 returns and liquidity are reasona bly good. However, the interest income received from the scheme is fully taxable.The interest rate is linked to the government bond yield. It is 1 percentage point higher than the 5-year government bond yield. Unlike in case of the PPF, the interest rate will remain unchanged till the investment matures.Smart tip: Stagger your investments in the Senior Citizens' Saving Scheme across 2-3 financial years to avail of the tax benefits.
The New Pension Scheme (NPS) is yet to become a popular choice because Returns of the complex procedures in 8-11 % volved in opening an account. But in past five investors who managed to cross years that chasm have found it reward ing. NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those of the Nifty, while corporate bond funds and gilt funds have given close to double-digit returns. But financial planners believe that the 50% cap on equity investments is too conservative. The other sore points is the lack of liquidity and taxability of the income. The annuity income will also be fully taxable.Smart tip: Start a Tier II account to benefit from the low-cost structure of the NPS.
BANK FDS, NSCS
Bank FDs and NSCs score high onsafety, flexibility and costs but the Returns tax treatment of income drags down the overall score. The inter8.5-9.1 % est rates are a tad higher than what for 2015 the PPF offers but the income is fully taxable at the slab rate applicable to the individual. They suit taxpayers in the 10% bracket (taxable income of less than `5 lakh a year). The big advantage is that these are widely available. Just walk into any bank branch and invest in its tax saving fixed deposit.Smart tip: Build a ladder by investing every year.After the fourth year, just reinvest the maturity amounts in fresh deposits.
Pension plans from insurance companies remain costly investments that Returns are best avoided. Instead, it may be 8-18 % a better idea to go for the retire in past three ment funds from mutual funds.
years They give the same tax benefits but don't force the investor to annuitise the corpus on maturity. He is also free to remain invested beyond the age of 60. Till now, all the pension plans were debt-oriented balanced schemes.Last week, Reliance Mutual Fund launched its Reliance Retirement Fund, an equity-oriented fund.However, ELSS schemes and Ulips can be used for the same purpose.Smart tip: Wait for the launch of retirement funds and assess their performance before investing.
Traditional insurance plans are the worst way to save tax. They require Returns a multi-year commitment and give 5.5-6 % very poor returns. The insurance for 20 year regulator has introduced some plans customer-friendly changes but these plans still don't qualify as good investments. The only good thing is that the income is tax free. But then, so is the income from the PPF and tax free bonds. Another positive feature is that you can easily get a loan against such policies, which gives some liquidity to the policyholder.
Smart tip: If you have a high-cost insurance plan, turn it into a paid-up policy to ease the premium burden.
Dircption:- Taking a cue from the Centre, which recently raised taxes on petrol and diesel to boost revenues, six state governments have, over the past few weeks, raised the value added tax (VAT) on these auto fuels. Others could soon follow suit. While the Centre hiked specific duties not linked to the price, the states are raising levies to offset an adverse impact to their tax revenues from the fall in prices of auto fuel prices since VAT is levied ad valorem.
Odisha, Madhya Pradesh, Goa, Rajasthan, Punjab and Haryana are among those that have recently upped the VAT on auto. Orissa raised VAT on both petrol and diesel by 3 percentage points to 23% on December 25 while Madhya Pradesh raised the tax rate by 4 percentage points on petrol to 31% and by an equal measure on diesel to 27%. Haryana raised VAT on diesel from 8.8% to 11.5% on November 25.
Trend-OilThe move marks the reversal of a trend among states, over the last four years, of cutting the VAT on petrol and diesel to reduce the impact of high global crude oil prices on inflation.
Crude oil prices stayed above $100 a barrel between 2011 and August 2014; between June last year and now, they have fallen by nearly 50% to levels of around $51 per barrel.
Since the tax increases by the Centre, and now the states, coincide with the reduction in fuel price announced by retailers IOC, HPCL and BPCL, consumers won’t get the entire benefit of the price fall while states could get away with higher revenue collections. Petrol prices have been reduced, gradually, by a total of Rs 12.27 per litre and diesel rates by Rs 8.46 a litre since last August in line with the fall in global crude oil price to around $50 a barrel last week from $115 a barrel in June.
The Centre’s move to raise excise duty on petrol by Rs 6 a litre and on diesel by Rs 4.5 a litre in three steps since November 12 last year is expected to help raise about Rs 17,000 crore as revenue this fiscal. For a full year, the duty increase could fetch the Centre about Rs 58,000 crore.
Had the Centre not raised taxes and oil marketing companies IOC, HPCL and BPCL retained the extra margin from the falling crude price, it would have reduced their under-recoveries and thereby the government’s subsidy outgo to them.
Goa, where petrol is the cheapest in the country because of the low tax rate, raised VAT on the fuel from 3.5% to 10% from January. While Punjab raised VAT on diesel by 1.5 percentage point to 11.25% with effect from November 15, Rajasthan raised tax on both petrol and diesel by 4 percentage point to 30% and 22%, respectively, from December 18.