My BB beeped and somewhat familiar and to greater extent unfamiliar voice on the other side said, “This is Mayank.”
“Yes, tell me”, I couldn’t place him still however with this habitual reply, I gave myself a little more time and started to think who he was.
Caller probably sensed that, I am not able to put face to his voice and he replied “Remember – If there are no free lunches, opt for dinner”. That certainly made it easy for me to identify him.
“Oh certainly, Mayak, tell me”
“Can we meet today at my place; I need your help again. Now, it’s my turn to host you. How about 8 p.m. tonight”
“Yep, I would be at your place around 8 p.m.
“Tell me how I can help you with your tax planning” No sooner did we complete formal greetings, I fired my first salvo.
Surprised, startled, puzzled, shocked was the look on Mayank’s face.
“I don’t need to be an oracle, seer, soothsayer or clairvoyant my dear friend. It is very logical. We are in the month of January and since you are seeking my help on financial matters, it would almost always mean what I always call ‘Tax Sprint’.”
“Hmmm…OK, as you rightly guessed, it indeed is the Tax Sprint”
“As always, jot down, your total annual income including, salary, interest received, dividend received (with date of investment and date of receipt of dividend) etc. on a piece of paper and then we will move over your taxable limit, tax planning options”
“Taking into account, current tax slabs and your annual income, your total tax liability comes out to be INR 12,000. Since you have not utilized any of the various deductions that are available under section 80 C of Income Tax act, your total income tax liability would be nil, once you invest in these two EEE options that I would recommend.
“What do you mean by EEE option?”
With the expressions befitting the almighty, world beater I replied “Well, EEE i.e. Exempt-Exempt-Exempt. It is the ultimate luxury offered to tax payer. Under this scheme, the initial amount invested, interest gained throughout the maturity period and maturity amount are completely tax free”.
“What are these magic options?
“They are Public Provident Fund (PPF) and Equity Linked Saving Schemes (ELSS). These two options are as similar as chalk and cheese! One is conservative, offers steady return whereas other option is aggressive, volatile and returns could be variable, but mix of both makes a good potion!!. Lets understand a bit more about these options then.”
Public Provident Fund (PPF):
“The darling of all retail investors, this allows you to invest up to INR 1, 00,000 at the rate of 8.6% per annum for this year. The rate of return will now be revised every year and is linked to yields of gilt securities in the secondary market. The interest is compounded annually, but calculated monthly on the lowest balance between the fifth and the last day of every month.
Long lock-in period of 15 years could be a deterrent, but believe you me; it is only in your mind. After 15 years you can renew this account for another 5 years and can continue this as long as you want, so practically this is an account and saving option for life time. Even if you invest, INR 70, 000 every year the power of compounding at the end of 15 years or beyond, makes gargantuan sum at maturity and your Financial Freedom would not be in the list of archaeopteryx, dinosaur!!
This option is also attractive since you can also avail loan facility in the third financial year from the date of opening of the account, or upto 25% of the amount at credit at the end of the first financial year.
PPF also offers the partial withdrawal facility. But you can do this is only after five financial years from the end of the year in which the initial subscription was made. In effect, this works out from the seventh year onwards. The amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year -- immediately preceding the year in which the amount is to be withdrawn, or at the end of the preceding year, whichever is lower.
“I do not have PPF account”, Mayank derailed me!
“You can open PPF account with either with nationalized banks like SBI and its subsidiary banks, Bank of Maharashtra, Bank of Baroda private sector banks like ICICI Bank or Post office.”
“OK, I will initiate the process for PPF tomorrow.”
“Very well then, we move to another option”
Equity Linked Saving Schemes (ELSS):
Among all the other investment opportunities, ELSS has the least lock-in period of 3 years. ELSS is just like any other mutual fund schemes; however investment in these tax saver schemes offers tax benefit unlike others.
Features like tax-free dividends, no tax on income, shortest lock-in period and potential to give high returns make ELSS very attractive option to those investors who are ready to take a bit of risk. However a careful look at the past 3 year performance of some of the top ELSS schemes indicates that one can earn returns as high as 20% or more and thus makes this calculated risk worthwhile.
Moreover with DTC looming large over tax planning, this could be the last year for an opportunity to invest in DTC.
“Which Tax saver schemes should I opt for?”
“Well you can opt for ELSS with proven track record viz. Fidelity Tax Advantage, Canara Robeco Equity Tax Saver, Franklin Taxshield, Taurus Taxshield, ICICI Prudential Tax Plan.”
“Depending on your risk appetite, choose suitable proportion of investment in these debt and equity options. Also remember, while investing in ELSS remember, every investment has a lock-in period of 3 years and thus fine tune investment accordingly.”
“Additionally, there are other tax saving investment options available viz. Infrastructure Bonds, Medical Insurance.”
“I am famished and I have not an iota of doubt that so are you” Mayank came quickly to the point.
P.S.: This advice from a person who is not Financial Planner by training or education is ratified days after I published this post.
The article published in DNA Money on Jan 25, 2012 suggests the same strategy of financial planning as in the blog. (http://www.dnaindia.com/money/column_start-the-year-with-tax-plan-to-optimise-returns_1641836)
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