Thursday, March 15, 2007

A New Equation ‘Tax Planning = Financial Planning’

According to a common taxpayer’s perspective, choosing an instrument, for saving tax, is a big job. Most commonly, all the investors choose one of traditional instruments(PPF or NSC). But in today’s world, we have other options too. First, lets look the Section 80C.

The avenues available under 80C are

1. Premium paid for Life Insurance.
2. Contribution to Provident Fund.
3. Payment of Tuition Fees.
4. Investment in PPF.
5. Investment in NSC.
6. Investment in ELSS (Equity Linked Saving Schemes.

We can invest in the above avenues with a cap of Rs.100000. Additionally you can use another option

7. Repayment of Principal (With the Ceiling of Rs1.5 Lac) .

So you invested Rs 1 Lac in any of the above instrument. What is the return rate..?

Particular

PPF

NSC

ELSS

Lock in Period (in Years)

15

6

3

Minimum Investment

500

100

500

Maximum Investment

70000

100000

100000

Return

8%

6%

12% to 20%

Tax on Returns

Nil (As an date, there is no EET structure is followed)

Taxable

Dividend and Long Term Capital Gains are Tax Free


On seeing the above table, the last column of the table is pulling one to invest in ELSS for tax savings. But that ELSS instrument is fully based on the equity market, the return is not an assured one. As I mentioned earlier, may be in my earlier post, investing in ELSS is based on one’s risk appetite.

In common one can take risk in his early ages. On taking this in mind, most of the financial advisers are advising us to allocate our asset (for Section 80C). That is

Age

Life Insurance Premium

EPF / GPF

PPF / NSC

ELSS

Total

< 30

10000

25000

20000

50000

100000

30-45

10000

30000

25000

35000

100000

45-55

10000

350000

30000

25000

100000

> 55

10000

-

65000

25000

100000


Why they are recommending this kind of asset allocation ,..?

Let us discuss some times later.

Friday, March 2, 2007

One of the Major Relief for Taxpayers in the Budget 2007-2008

According to Subhash Lakhotia's view on the current budget, he mentioned that the special feature of the budget is FM is not considered the EET which give the taxpayers a relief for another one year. (Subhash Lakhotia is a New Delhi based tax investment consultant)

What is this EET ? In what sense it will affect Tax Payers..!?

Normally we used to do taxsavings in the form of PPF,GPF and NSC and much more. Here comes the terms EEE and EET .

Say suppose you are investing Rs 70,000 in PPF(which is the upper limit for this instrument under sec 80C of IT ACT). At the time of contribution in a particular year the amount contributed is exempted from Tax. This is the First E. The accumulated interest on this amount is also exempted from Tax and this is the Second E. When you are withdrawing the amount (after the 15 year Lock-in Period for the PPF) that is also Exempted from the Tax on that particular year. So the savings under 80C instruments are now availing the EEE Benefits.

In the previous budget our FM outlined that this EEE will be turned to EET in future. If it does so, all the withdrawal made from 80C instruments will be fall under taxable income that is the last E(xempt) will turned to T(axable). Basic idea of EET structure is to recommending a long term investing.

But FM does not mentions anything about that in his current budget.. We have one more year to enjoy the benefits of EEE.


Further readings

http://in.rediff.com/getahead/2006/feb/20ppf.htm
http://economictimes.indiatimes.com/articleshow/1378923.cms