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Best Tax Saving Options for Indians


When it comes to investment in India, many see it as a necessity for tax saving purpose rather than a important decision which may uplift their lifestyle to next level. Some of the most commonly known sections in Income tax are “section 80-C” and “section 80D”. As per current financial year 2016-2017, you will be eligible for 1.5 lakhs under section 80-C & for Insurance you are eligible to a maximum deduction of 25,000 for yourself and another 30,000 for your parents under Section 80-D.

 

If all these sections are used wisely you will be able to save tax and also create your future. Look at investing 5000 every month in ELSS or Tax saving mutual funds for the last 10 years,

 

Top five funds have given more than 15% returns and you will be able to make a mnimum of 13 lakhs by just investing 6 lakhs that too over the period of 10 years. Advantage is that it is tax free and already you had saved a yearly amount based on your tax slabs.

 

If you fall in 10% tax slab for the whole ten year period, your tax savings itself will be 6000 per year  and for 10 year period it will be 60000.

 

If you fall in 20% tax slab for the whole ten year period, your tax savings itself will be 12000 per year  and for 10 year period it will be 1.2 lakhs.

 

If you fall in 30% tax slab for the whole ten year period, your tax savings itself will be18000 per year  and for 10 year period it will be 1.8 lakhs.

 

Tax saver - Since Inception-your-money-matters.png

 

Source : AdvisorKhoj

 

Are you using tax saving options wisely?

 

Options for tax savings and investment ;

Generally we grudge over paying so much tax. We forget the point that investing wisely by using the appropriate tax savers can increase your wealth. There may be more than 150 movies released in hindi every year and on an average people see only couple of movies based on their interest. If you are a shah rukh fan you will wait for his movies and in mean time if any good movie comes you may go with your friends. Some may wait for Salman khan movies.

 

Similarly there may be many tax saving instruments provided by “Income tax Authorities” but you need select which one suits you in the long run. In the past most of the central and state government employees use to allocate money in their EPF or Employee provident fund account. This is completely tax free instrument and returns were more than 10%. Now with spiralling inflation in the past few decades along with consumerism these may not be enough,

 

Provident Fund;

 

Provident Fund returns in the last 60 years are provided below,

 

 PF history-your-money-matters.png 

If you analyse this historic data, our previous generation had benefited from the higher interest rates provided by PF and this is one of the reason for their favor for these fixed return instruments. Inflation has been higher in the past and hence interest rates are kept higher to tackle it, now Government is moving in the direction of reduced inflation and hence it is expected to reduced the interest rated in the long run. See the PF historic data before 1960, were the PF interest rates are even lesser than 5%. Once this inflation is reduced automatically the fixed deposit rates will also be reduced.Remember that any government will do this and they have to as when the RBI has reduced interest rates to less than 5%, Government will not be able to provide more than 8% at any point of time.

 

If you are investing 4000 per month for full 15 years @ 6% interest rate in PF,

 

         Invested amount will be 7.2 lakhs & Maturity amount will be around 11.5 lakhs.

 

If you have been investing in ELSS or Tax saver mutual funds, this return will be around 19 lakhs, calculating @ 12%. 

 

In the past ELSS has given more than 15% and we have considered only @ 12% only.

 

Life Insurance Policies; 

The most common tax saving instrument next to PF is Life insurance policies. PF is by force you will be debited out of your Basic salary and the remaining tax savers needs to be taken by only you. Most of your insurance policies will be sold by either your close relative or neighbourhood friend and this is just for the sake of not losing relationship. 

Donate for the poor, but not for these insurance policies because these are your hard earned money and these fellas will not be out there from second yer and if you question them on the usefulness they will not be able to say it for sure.

Check the returns from leading Life insurance policies. There is nothing wring in availing these policies if you are fully aware of the returns & this can be suitable for someone who doesn't have any other asset classes in his portfolio. Still it is better to look for the best performing financial asset which will be useful in the long run.

 

How to avoid taking these policies?

  1. Ask for the complete benefits
  2. See if it beats inflation rate. Inflation rate in the last decade is more than 8%
  3. See if the returns are projected more than 8%, as per current IRDA guidelines returns can be shown as 4% or 8% only.
  4. Investment decision needs to be seen in a different perspective rather than personal relationships which can be told straight away.

 

ULIP;

 Unit Linked Insurance Plans have performed well in the last few years after the regulations were put in place. Some of the funds have given returns of even more than 15%. In the last 3 years the market have rallied and hence the returns are higher and also both in debt funds category and in full equity category the returns are extra ordinary. 

One thing not to forgot here is in the initial 3-5 years there are some charges to the maximum of 9% which may be deducted from the premium paid. Leaving these charges the returns will be reduced to below 15% in “small & mid cap” category also.

There are many variants of ULIP’s available like child policy, retirement benefit, wealth creator etc. Please check if the premium made will be sufficient to make the required corpus for that goal. Further this have lock in period of 5 years and many are advised to invest only till this period only, which is absolutely tarnishes how ULIP works. ULIP is long term wealth creating insurance cum investment product. So you need to wait for a period of 5-10 years minimum for proper wealth creation and mind that you need to monitor the fund category you are investing in. If you can enquire with people who had invested during 2007-2010, they can explain the losses that this product has created.

I have personally invested in “Birla Sunlife - Jeevan saral" during 2008 and suffered losses, as i didn't require money during that phase kept investing and learnt the mistakes of closing it immediately. So finally closed last year in profit. If you put in debt fund category it will take more than 10 years.

So, if it is ULIP, invest for a longer period of more than 7-8 years and monitor. Even if the name has  “wealth builder” or “Elite” it may not suite you unless you know how the funds will perform.

 

How ULIP works?

 

Mostly ULIP is confused with Mutual funds as both are denoted by NAV. Generally if you are paying a premium every month or yearly, you will be allocated units.

 If you are paying 3000, and the unit value is 30, you will be allocated 100 units in your insurance policy. Then based on daily movement of debt funds or equity funds unit value will differ. After this allocation of units, all charges will be deducted based on units.

 

So after deductions you may be having around 95 units only. 

 

ELSS or Tax saver Mutual funds;

 

ELSS or Tax saver mutual funds can give you more than 15% returns if invested in best performing and you are monitoring. As the whole amount is in equity there may be losses after 3 years, so it is better to invest with a tenor of 3-5 years to get better returns.

 

Further the advantage in this product is that this is the only tax saving financial product with less lock in and best returns.

 

ULIP Vs Mutual fund;

 

There is always this thought that ULIP and Mutual funds are one and the same. There is a major difference between ULIP and Mutual fund.

 

Mutual funds;

 

1) Charges are capped based on the category and maximum is 2.5%

 

2) Tax saver mutual funds alone has lock in of 3 years and rest don’t have lock in periods.

 

3) Benchmark is 12% and best performers have done more than 15-18%

 

ULIP;

 

1) Charges in the initial 5 years are around 7-9%.

 

2) All have lock in of 5 years

 

3) As per IRDA it is 4% or 8% and only if you have invested in equity category you can expect double digit returns. 

 

Post office schemes;

 

Kisan Vikas patra is one of the product which had doubled returns of the investments in 8 years in the past. There are tax saving fixed deposits, National saving scheme bonds which provides tax benefits. 

 

These are safer and secure way of investing for the people who didn't get any other details about other products across India. Post office by mistake or an advantage has been one of the boons as more people are covered with this network. I personally feel that this network can be used to spread awareness about financial products in India and for the betterment of life.

 

Why to choose the best returns providing financial product?

 

Probably this section can clear the doubts of why to choose the financial product with best returns?, Here are some of the reasons,

 

1) Lock in period

Lock in period is more important as you will not be able to take your investment amount. PF by nature has lock in of 15 years and it has been designed to have some amount for your longer period. If it performs compounding work same as Provident Fund you can keep your investment for longer period, hence it is very prudent to monitor the performance of product you are choosing even if it is in lock in period.

 

2) Best returns

This is the most important criteria and due diligence should be done. Insurance agent or distributor may say humongous returns in the next 3 or 4 years itself, check the returns mentioned by us in each of the sectors and then question them.

 

There are best and worst performers in all the financial products, so if someone focusses on big returns be careful.

 

3) For prosperous future

If you are looking for better returns and better future, you need to look at a product which can quickly doubles and done that consistently in the past. One such product is “Kisan Vikas Patra” by post office, it was even advertised as a product which doubles your money in 8 years as the returns provided during that time was 9%.

 

Considering inflation this may not be sufficient but if this is one of your saving, then you can invest in this. 

 

Real Returns;

Real returns are never taken into consideration while investing and this term is unknown to many. Generally if we purchase any product we will make sure that we are getting bigger discount in one of the place. Consider the latest craze of buying mobiles phones from online market places such as flipkart, amazon or snap deal etc. There was this friend of mine who had bought a ear phones from flipkart and later in the day found that he is getting another discount of 50 rupees from Amazon. As expected he has duly cancelled the purchase he has made and then later bought in Amazon.

 

Reason for this reference is that, are you looking for for returns when you are making an investment?

Next time when some one says 10% returns on this product X, ask what is the real return or find i by yourself with this simple calculation of deducting the inflation rates.

 

Returns mentioned by the service providers are “Nominal Returns” and deduct “Inflation” from this, then the value you are getting is “real return”. Consider iNflation as 8%.

 

If the returns from Mutual fund is 12%, real return is 12 - 8 = 4%

 

If the returns from insurance is 8%, real return is 8 - 8 =  0%

 

If the returns from Post office schemes are 8.6%, real return is 8.6 - 8 = 0.6%

 

Now look at he real return, based on the benchmark returns provided by regulators, only mutual funds can provide around 4% returns and rest are all making sure you are able to purchase in the next year.

 

How to choose your best financial product?

 

Check the returns of your investment you are making in fixed deposits or post office deposits or Life insurance policies or ULIP or Mutual funds. These returns can be provided by distributors or insurance agents or financial advisors. 

 

Now calculate the years taken to double your invested amount by using RULE OF 72, this can give you a fair idea of how much years it will take for that investment product

 

Life Insurance policy by above example has given 5.5 returns, so divide 72 by 5.5,

 

     = 72 / 5.5 = 13 years.

 

It takes 13 years to double your amount, if your policy term is 10 years your insurance policy will to be able to give you double return and only if it is 20 years, it can slightly provide better than double returns.

 

For Provident fund, let us assume that the average return was 9% in the last decade, so

 

    = 72 / 9 = 8 years

 

by compounding the years may reduce a bit but not by great margin.

 

For Tax saver mutual funds, benchmark return is 12% and some of the best performing mutual funds had given more than 15% itself,

 

Assuming 12% itself, 

 

 = 72 / 12 = 6 years.

 

If you had assumed 15 years, it reduces to 4.5 years only.

 

Now is it wise to invest in a product which doubles in less number of years or more number of years. 

 

Choice is yours ! ! !

  

Another simple way of choosing the best tax saver product is to approach a financial advisor as he can look into long term returns and not only from tax saving products alone. It is easy to get advise during tax saving season, but make sure that the advise you get is valid and even if it is valid it will suit for your need.

Based on the interactions recently, there are many who earns big but doesn't know on how to choose a investment product. This makes this Financial advisor profession unique and much needed on similar lines to doctor who takes of your life during crisis. One of the person whom i had met recently is in a better position and in his early 50’s, he has invested through many advisors and some PMS products provided by leading banks as well. He got more stressed out and started investing in fixed deposits itself. 

 

choose a advisor who is able to ,

 

answer all your queries, 

 

who is genuine & transparent, 

 

who doesn't push you to buy immediately

 

Further you don't need to believe in the advisor immediately, take time to analyse and understand with the facts he had provided. 

Its your investment decision and you need to tale considerable time before fixing on some one. If you are planning with “section - 80-C” Investments properly then you can enjoy with the other available money.

Is Your Money Matters  Cool ? ? ?

 

Tags: Savings, Tax, Investment

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