ice risk/re-investment risk Credit risk Liquidity FMPs are able to mitigate most of the above risks by the very nature of their structure. They are less exposed to interest rate risk compared to other income schemes since instruments therein are typically held till maturity and hence yield a fixed rate of return which is equal to the yield at which investments were made. They also carry minimal liquidity risk as exit load is applicable for withdrawal before maturity. Hence, most investors withdraw only on the fixed maturity date of the scheme. Since they hold instruments till maturity, they also minimise expenses. As there is no regular churning of the portfolio, this significantly reduces the overall cost of transactions. Investors with a time-horizon of more than one year can actually end up paying zero tax by using a trick called double indexation. Double indexation gives an investor the advantage of indexing his investment to inflation for two years while remaining invested for a period of slightly more than an year. This can be done if the investor puts in his money just before the end of a financial year and withdraws it immediately after the end of the next financial year.
KEY TAKEAWAY: Short-duration fixed maturity plans (dividend plan) are ideal for less than one year. Thirteen month FMPs are best alternatives for one-year bank deposits. Do not commit yourself to more than one year of FMP as you run the risk of tax policy changes mid-way. If finance ministers start looking closely at FMPs, they may simply stop allowing indexation benefits for debt funds and that will make your calculation go awry. Home is where there is no tax
Owning a house is imperative. Not just owning, but owning one on borrowed capital. The key change that the Budget has brought about is that there is no longer any cap on the amount of principal repaid on your housing loan for tax deduction. Under section 88, the limit was Rs 20,000. So your principal repayment alone can constitute the entire Rs 1,00,000 eligible for deduction. The deduction on principal repayment is over and above the deduction already available on housing loan interest up to Rs 1,50,000. To put it simply, monthly installment of Rs 20,833 will be eligible for full deduction from your income if you have no other investments/expenses eligible for tax deduction. For people who are paranoid about housing loans, you can derive solace from the fact that lowering your present debt is as good as saving for your future in the taxman's eye. Actually, principal repayments can be a good alternative to savings. Since some part of your income as a salaried employee goes towards compulsory savings through your contribution to the employees provident fund, you can choose to simply reduce your debt burden to get tax breaks. For those who thrive on borrowed money, there is no limit on the amount of deduction you can claim on the interest paid on loans taken for house property (after deducting rental income from the same) which is not self-occupied. If the interest repaid is, say, Rs 5,00,000 in a particular year, this expense is fully deductible from your gross taxable income. So you actually end up paying no income-tax at all. Of course, you need to have a supplementary income to support your living expenses! Currently, home loans rates are hovering around 8 per cent. If you are in the top tax bracket, your tax savings can be upto 30 per cent, meaning your effective cost of funds comes down to less than 6 per cent. KEY TAKEAWAY: Prepaying principal can be a good alternative to savings. People in the high income bracket can indulge in a second house to lower their tax burdens substantially. Equity for the long haul
Another way to perk up your regular income is to invest a portion of your investments in equity-based dividend-yield schemes which invest in high-dividend paying stocks. By virtue of the fact that their stock price is low in comparison to the dividend they pay (that is what makes the dividend yield high), the stocks are less risky. Since these are equity-based schemes, the dividend paid by them is tax-free. When you buy and sell units of equity funds you pay a securities transaction tax of 0.2 per cent as in the case of equities. Short-term capital gains are taxed at 10 per cent while long-term capital gains are fully exempt from tax. Currently, there are three dividend-yield funds available in the market, one each from Birla Mutual, Principal PNB Mutual and Tata Mutual Fund. Besides, equity linked savings schemes are also a must-invest proposition now. The fact that investment in ELSSs entails a tax saving of upto 30 per cent (if you are in the top bracket) is to say that you can buy equities at a 30 per cent discount or that you earn a 30 per cent return on day one of investing. Thus, ELSS can be an excellent alternative to investing directly in stocks. The prudent way to invest in ELSS is to commit a regular amount every month towards purchasing units of ELSS rather than bunch investments and buy units towards the end of the year. This will not only ease the burden towards the end of the year but also average out your cost of acquisition of shares since you would buy more units when the markets are high and less when the markets are low. KEY TAKEAWAY: ELSS is smarter than direct equity purchases for most people.
-- Standard Chartered Mutual Fund
| How double indexation reduces your tax outgo The indexation table published by the income-tax authorities is a series of numbers for every year from 1981-82 that reflects the impact of inflation. | ||||||||||||||||||||||||||||||||||||||||||||||||
| For example, let's see the use of double indexation for Rs 10,000 saved in a fixed maturity plan that opened on March 31, 1995, and returned Rs 11,000 on closing on April 1, 1996. Thus the yearly return on savings is 10 per cent. | ||||||||||||||||||||||||||||||||||||||||||||||||
Now the person who saved the money calculates tax payable at the end of the year in three steps.
|
Owning a house is imperative. Not just owning, but owning one on borrowed capital. The key change that the Budget has brought about is that there is no longer any cap on the amount of principal repaid on your housing loan for tax deduction.
Another way to perk up your regular income is to invest a portion of your investments in equity-based dividend-yield schemes which invest in high-dividend paying stocks.