Smart tax planning an investment management nightmare?
April, 02nd 2012
My portfolio is a nightmare and I am not referring just to the losses. Smart investment planning over the years has meant that I have a little bit of this and some bit of that small amounts parked here and there. For many, the Rajiv Gandhi Equity Savings Scheme and the re-introduction of exemption on interest earned from savings bank accounts will also add to some of the mess before the final Direct tax Code kicks in later and causes a major upheaval in investment preferences. Govts tax flip flops only add to complexity of portfolio management.
Just consider this. Tax treatment changes over the years, have, at different times, made different kinds of investments attractive. My mutual fund portfolio today has schemes with a dividend option, dividend re-investment option & growth option as dictated partly by tax laws of the time and my investment outlook & need for liquidity. I had to commit Rs 10,000 to a pension scheme under the erstwhile 80CCC scheme which allowed an extra Rs 10,000 of deduction over & above what was then Section 88. Later, the additional component of Rs 10,000 was conveniently clubbed into what is now known as Section 80C. This left less room for me to claim my other investments & eroded the single most important reason why I invested in the pension scheme. I am still stuck & contributing to that low yielding scheme.
This years budget, by bringing back exemption on interest earned from savings accounts, brought back memories of a now defunct Section 80L. That section specified that interest earned up to a specified amount (which kept changing from budget to budget) would be exempt from tax. For many small savers, it avoided the hassle of computing interest income and paying tax on it. In recent times, disclosure of interest earned & tax payment on it became required activity. Now, in a reversal of sorts, the budget for 2012-13 reintroduces the concept.
My quest to save tax has also led me to invest in Infra Bonds that till this financial year offered an additional Rs 20,000 deduction these bonds were, by the way, discontinued some time back but resurfaced a couple of years back . So, now I have an investment of Rs 40,000 in Infra Bonds offered by different companies. The lack of safe, decently yielding options has also led me to Tax Free Bonds this year. Amount invested is not too great and I will need to remember the redemption month & year which, by the way, are 15 years down the line.
Add to that the fact that I have found many of my long term (tax saving) investments lose value because a static Section 80C limit of Rs 1 lakh has meant I always run out of room to claim tax benefit for an investment I made some years back! A lions share of my limit under Section 80C is now automatically consumed by contribution to the mandatory Employee Provident Fund. So, all the long term insurance (read investment) policies I bought (thats how policies were before term insurance plans came in) over the last decade have become a liability as I no longer have room to claim credit on the premium I pay for them. The result, the post tax yield on my long term investments is not what I started out with.
Net-net, i am left with different types of investment instruments, yielding different types of returns (monthly payouts or cumulative), spread over different tenures. On me now lies the responsibility of tracking the payouts, redemptions & consequent tax implications (which by the way can change). Yes, Direct Tax Code is expected to be the messiah through its promised simplification but I sincerely hope the government would stock to its conviction and desist from tinkering with it once its out. Just figuring out a suitable investment is challenging for the small investor, managing post investment rules changes is a nightmare!