Category Archives: Tax Saving

How to create Wealth

Making money is a short-term process, while creating wealth only happens in the long run. The foremost challenge faced by most of us is to pick the right investment product. Also, the presence of a wide range of products makes the choice even more difficult. The investing decision may not be based on fundamentals or price but rather on optimism. However, when negative news hits the market, the expected return from that investment suffers because as the news spreads, pessimism builds up. High level of negative sentiment leads to panic selling. Investors tend to sell their holdings thinking that they can at least protect capital from the fluctuations of the market.

A fall in markets can be looked upon as an opportunity to invest further or simply be ignored. Rupee cost averaging is a useful technique to reduce the cost of investment. When the market tumbles, you can pick up a security at an attractive value, effectively reducing the initial cost of investment into that security. Suppose you had bought 10 units of a stock A at a price of Rs 500. Due to market movements, the price falls to Rs 200. When you add another 10 units, your average cost for 20 units comes down to Rs 350.

Investment plans available in India

Today, the youth is taking interest in Investments but lack of knowledge and working on the advice is the great danger in the present market. One show know what are the plans available in the market and how to get optimized return and also calculate the Income Tax on the Returns available. According to Income Tax Act, 1961, an Individual can save tax on the Amount of Rs.1 lakh by investments as under:

PPF (Public Provident Fund)

The PPF is a long-term, government backed small savings scheme of the Central Government started with the objective of providing old age income security to the workers in the unorganized sector and self-employed individuals. People who are interested in liquidity or small-term gains would not be very keen about PPF because the duration for the investment is 15 years. However, the effective period works out to 16 years i.e., the year of opening the account and adding 15 years to it. The contribution made in the 16th financial year will not earn any interest but one can take advantage of the tax rebate.

The minimum deposit that you can make into a PPF account in one whole financial year is Rs. 500. The maximum is Rs. 70,000. The amount you invest is eligible for deduction under the Rs. 1, 00,000 limit of Section 80C. On maturity, the entire amount including the interest is non-taxable. Currently, the interest rate offered through PPF is around 8%, which is compounded annually.

How much investment should be made from Rs.1,00,000? It’s a good investment and secure, every one should invest in this scheme but not more than 5,000 per year as their two reason for it. The period is very long 15 years and the return on the investment is much less as compared to other plans and second most you are saving tax on Rs.5,000 but on the maturity Rs.5,000 and the interest earned on it all is fully taxable and nothing is exempted, so you are saving from tax now but paying it later stage. The purpose of tax saving is lost here but one should not ignore it and must invest in it in a small amount.

Fixed Deposit and Recurring Deposit

Fixed Deposit in not exempted under Tax Saving Plans and thus all the Interest earned on it will be taxable. The deposit are exempted from tax but the interest earned on it is fully taxable and would be shown under Income from other sources. Thus one should can invest Rs.1000 P.M. as R.D.

Insurance (only Life Insurance) and Unit Link Plans

For last 5 years Insurance has emerged as the biggest investment scope. In the last 5 years Insurance sector has grown about 500-600%. Now question arise what is the benefit of investment in Insurance? There are three things which make to think on the Investment are: a) A Life Insurance cover (if any thing goes wrong sum insured or value of fund whichever is higher given to you); b) You get the Tax benefit upto Rs.1,00,000 for having investment in Insurance (Normally sum insured is 5 times the sum deposited) ; c) Return on Investment (Insurance companies invest in Unit Link Plans)

Unit Link Plans means that when you invest the amount or take an insurance plan they give you the market prevailing price of their unit. Now question arises what are these units? The company invest your money in share market with AAA+ grade companies as guided by TRAI. Now, you now that share market is volatile and gives you return when you invest it in long period or invest large amount for short period. The Insurance companies are doing  the same thing. For doing this they charge you with Annual Maintained Charges and on month to month basis they also charge you for morality charges for insurance. All the charges are deducted from units equal to the amount of charges. Lets assume you have taken 1000 units of Rs.10 each and Annual charges are Rs.1000 then they will deduct 100 units from your balance i.e. 1000-100=900 and you let with 900 units. If the market goes down your fund value decreased and if market goes up your fund value goes up.

The main benefit of investing in Insurance sector is that the value of unit increase or decrease marginally even the market falls rapidly or vice versa. Another benefit they gave that you can invest in secured bounds and securities of government fund and they provide the minimum fixed return on it. You can also shift funds from exchange from government funds. The best way to know the percentage of investment in debt fund is 100-your age. If you are 30 years old invest 30% of your money in debt or government funds. Another thing when you surrender the policy or policy period expires then all the money received is TAX FREE. But if you surrender the policy before period then read the document having the clause of lock-in period. If you redeem the money before lock-in period there would be heavy charges and all the amount in TAXABLE.

Mutual Funds: I will post it in my next post about mutual funds

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