5 tips for successful tax planning

The season for tax planning is already upon us. 31st March is the deadline by which we all have to file our tax returns. Unfortunately most people wait for the deadline to loom large over their heads before they  start their tax planning. In the process, what they do is they invest in the first available tax saving avenues without looking at the returns generated by those avenues. As a result, while they do save tax, they end up getting poorer. So if you want to enjoy the best of both the worlds, here are some tips you need to follow.

  • Find out your requirements. Are they short-term or long-term? If it is short-term, then your better options are post office savings, ELSS and government bonds. For long term savings, you can opt for insurance policies, PPF tax-saving bank deposits and infrastructure bonds.
  • Are you looking for high returns? Do you have a high risk-taking ability? Then ELSS and ULIPs are your best bet. Otherwise stick to good old PPF, other insurance policies, bank deposits and bonds.
  • Are you looking to make a single payment at a single shot or make frequent payments? In case of the latter, opt for PPF or ELSS, where you can make payments at regular intervals. If not, go for bank deposits, bonds or post office deposits. However when it comes to investing at periodic intervals, ensure you complete the entire investment before the year end in order to avoid paying the tax.
  • Get all the knowledge abou the products you are investing in. E.g. many people think ELSS and ULIPs need to be held only for 3 years. But this is not true as these products are dependent on the markets. So if the markets are high at the time of investing, it may so happen they may have crashed at the end of the holding period. So at that time you may find you have been stting on the loss and so may have to hold on to the investment for a long time.
  • There are other factors that should be considered when deciding on the investment. E.g when selecting ELSS or ULIPs, you need to take into account the past performance and the fund management experience. In case of ULIPs particularly, charges play a determining factor in deciding the selection of ULIPs.

 

Once you can do that, you can get an investment mix offering you high returns.

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Tips to get good returns safely

Think good returns and safety are a misnomer? Think both these words don’t go hand in hand? Then think again. It is possible to get good returns without taking undue exposure to risk. Here is how.

  • Company FDs: The FDs offered by the companies offer higher returns as compared to the bank FDs. However they are also riskier than bank FDs. So always select the FDs that carry at least A+ ratings or those offered by top corporates like Tata Motors, HDFC etc. It will ensure your capital is safe.
  • PPF: PPF is one of the best means of earning good returns safely. You not only get 8.5% interest on the corpus invested, it is also completely tax-free for you. Both the interest earned and capital withdrawals do not attract any tax, thus increasing your returns.
  • PO Monthly Income Scheme: Here you not only get an interest of 8% per annum, you also earn 1% bonus at the end of the term This interest will be credited to your bank account, every month, thus giving you a monthly income. It is ideal for retired people or people looking for additional income.
  • FMPs and short-term income funds: These are excellent alternatives for people eager to take slightly higher risk in order to earn higher returns. You can expect a return of 8-8.5% for a period of 1-3 years.

 

While all these means offer good returns, always remember that it is the ultimate combination of equities, gold and debt that will help you achieve the highest possible returns.

What is Public Provident Fund (PPF)?

Looking to save tax? Want secure yet tax-free returns? How about an investment option that is backed by government? Then PPF should be high on your priority. PPF a.k.a. Public Provident Fund is a savings account offered by Government of India. It can be opened at any public sector bank or post office. You can invest a maximum of Rs. 70,000 in a year. It carries an interest rate of 8%, which is tax-free.

Here are the main features of PPF:
• Absolute safety: As the amount deposited in PPF account is backed by Government of India, you can rest assured your money is in safe hands.
• Tax benefits: Investment in PPF attracts a tax rebate of 20%. You just have to show the proof of deposit and claim tax benefit.
• High interest: Though interest rate on PPF varies, it doesn’t change frequently. Present rate on PPF is 8%. Add to that the tax benefit you get, the interest earned is actually more than 8%.
• Low minimum investment amount: The smallest amount that you can deposit in PPF is Rs. 500.
• Loan facility: In case of emergency, you can take a loan against the balance in your PPF account. It is available from 3rd and 6th year. It can be up to 25% of the balance in your account and the interest rate charged on the loan is 2% more than the rate of interest earned on your PPF account. The tenure for the loan is 24 months.
• Extension available: Normally the tenure of PPF account is 15 years. After that you can extend it for further 5 years.
• Withdrawal facility: If in need of money, you can withdraw money from your PPF account. This facility is available to you from 7th year onwards. The withdrawn amount should be the lower of the 50% amount in your account at the end of 4th year and 50% of the amount in your account in the previous year.
• Eligibility criteria: Anybody can open the PPF account. However joint account is not possible. However if you think all is well with PPF, then you are wrong. It does have some drawbacks:
• Amounts over Rs 70,000 do not earn any interest.
• Interest rate may not catch up with inflation, thereby eroding the value of your money.
• If you are not to pay your yearly installment, then you are considered a defaulter. To regularize your account, you have to deposit Rs 500 as installment + Rs. 100 as penalty for each year of default.
• Government has plans to tax withdrawal from PPF in future. So you may end up paying tax ultimately.

Despite its drawbacks, PPF remains an excellent vehicle for long-term investment. So make the best use of it.

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