SMART WAYS TO SAVE TAX





Choose the tax-saving instrument that best suits your needs and financial goals

Do-it-yourself tax planning can be rewarding and challenging.

Rewarding, because you can choose the tax-saving instru ment that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters--returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.

While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!

ELSS FUNDS

ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency . The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund.Last year was not good for equities, and even top-rated ELSS funds lost money.However, the funds are miles ahead of PPF in 3and 5-year returns.

The SIP route is the best way to contain the risk of investing in equity funds.However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.

SMART TIP Opt for the direct plan. Returns are higher because charges are lower.

ULIP

The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What's more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.

SMART TIP Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.

NPS

The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of `50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity . Right now, the income from annuities is taxed at the normal rate.

SMART TIP Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.

PPF AND VPF

It's been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.

SMART TIP Allocate 25% of your pay hike to VPF . You won't notice the deduction.

SUKANYA SAMRIDDHI SCHEME

This scheme for the girl child is a grea way to save tax. It is open only to girls below 10. If you have a daughter tha old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Ac counts can be opened in any post office or designated branches of PSU banks with a minimum `1,000. The maximum investment in a financial year is `1.lakh and deposits can be made for 1 years. The account matures when th girl turns 21, though up to 50% of th corpus can be withdrawn after sh turns 18.

SMART TIP Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.

SENIOR CITIZENS' SCHEME

This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a `15 lakh overall investment limit.

SMART TIP If you want ot invest more than `15 lakh, gift the amount to your spouse and invest in her name.

BANK FDS AND NSCs

Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the `15 lakh limit in the Senior Citizens' Saving Scheme.

SMART TIP Invest in FDs and NSCs if you don't have time to assess the other options and the deadline is near.

PENSION PLANS

Pension plans from insurance compa nies still have high charges whic makes them poor investments. The also force the investor to put a large portion (66%) of the corpus in an an nuity . The prevailing annuity rates ar not very attractive. Pension plan launched by mutual funds have lowe charges, but are MFs disguised as pen sion plans. Moreover, they are debt oriented plans so they are not eligibl for tax benefits that equity plans enjoy for tax benefits that equity plans enjoy.SMART TIP Invest in plans from mutual funds.They offer greater flexibility than those from life insurers.

INSURANCE POLICIES

Traditional life insurance policies re main the worst way to save tax. Still millions of taxpayers buy these poli cies every year, lured by the "tripl benefits" of life insurance cover, long term savings and tax benefits. Actu ally, these policies give very little cover A premium of `20,000 a year will ge you a cover of roughly `2 lakh. The re turns are very poor, barely 6% if yo opt for a 20-year plan. And the tax-fre income is a sham. Going by the index ation rule, if the returns are below th inflation rate, the income should any way be tax free. The problem is tha once you sign up for these policies, the become millstones around your neck

-SMART TIP If you can't afford to pay the pre mium, turn your insurance plan into a paid-up policy.

Akbar Badruddin Jiwani
Mobile: 09323500008 Email: abjiwani@gmail.com Website: bhanudevelopers.blogspot.com

"Success is the ability to go from one failure to another with no loss of enthusiasm." - Winston Churchill

FLIPKARTSALE ON MOBILES

SMART HOMES AT NERAL

Please consider your environmental responsibility. Before printing this e-mail message, ask yourself whether you really need a hard copy.

Get a signature like this: Click here!

Take cover against disasters





You can't stop calamities but you can minimize their impact on your finances

It has taken a devastating earth quake to shake homeowners in In dia out of their slumber. Seeing the trauma and destruction in Nepal, everyone wants to know whether they can insure homes against earthquakes and how much would it cost.

Very few people take home insurance in India. "Even though it is very cheap, less than 1% of people who can afford home insurance actually buy this cover," says Tapan Singhel, Managing Director and CEO, Bajaj Allianz General Insurance Company .

This is surprising because India is disaster-prone. As much as 30% of the Indian landmass is prone to earthquakes of severe intensity. Another 27% is prone to moderate earthquakes.Nearly 12% of India is prone to floods and 76% of its coastline is prone to cyclones and tsunamis. "Even if someone buys home insurance, it is for a very short tenure. There is a greater need to buy a cover against disasters," says K.K. Mishra, Managing Director and CEO, Tata-AIG General Insurance.

How much it costs

A 1,500 sq ft house can be covered for `50 lakh against fire and other perils for less than `1,700 a year. If contents worth `10 lakh are included, the cost will go up by `400. You don't need to take a cover for the market value of the property but only for reconstructing it.Construction costs vary from `1,000 per sq ft for a no-frills structure to almost `3,000 per sq ft for premium.

Some companies offer discounts if you buy a comprehensive policy with additional coverage. We like the Householder Policy from Oriental Insurance that offers an array of 10 covers and gives discounts to buyers who tick on more than four. The policy covers nearly all the risks that your house and valuables are exposed to. A basic cover of `50 lakh for the building and `10 lakh for the contents is as cheap as `2,100 a year (see table). It can be bought online, though you might have to spend 40-50 minutes on drawing up an inventory of the items you need to cover.

As the cost of reconstruction keeps rising, you might have to increase the insured amount every few years. Some insurers offer discounts if you take a multi-year policy . If the premium for a `50 lakh cover is `3,800 a year, it will be 18% lower at `15,590 if you buy a fiveyear policy . If the escalation of rebuilding costs is a worry , HDFC Ergo has a policy where the sum assured goes up every year. The basic insurance cover rises 10% every year. The premium of the escalation option is higher at `19,100 compared to `15,590 charged for a normal `50 lakh cover for five years.

What gets covered

While all home insurance policies offer cover against earthquakes, some insur ers have a compulsory 5% deductible in case of damage due to an "act of God". An act of God is any event, especially a natural disaster, for which no individual can be held responsible. The deductible means that if your house is insured for `50 lakh, and it suffers a damage worth `20 lakh, the first 5% of the claimed amount (or `1 lakh) will be borne by you. Some insurers don't even have such deductibles. "Policies covering individual residences or dwellings with individual owners do not have compulsory deductibles. However, policies covering housing societies are subject to deductibles depending on the sum insured," says Subrahmanyam B, Head, Health & Commercial Underwriting, Product Development and Reinsurance, Bharti AXA General Insurance.

In some policies, this deductible can be customised. Raise the deductible, and the premium goes down.

What is not covered

While you can cover the contents of the house against damage and theft, some valuables are not covered. Cash, documents, share certificates and debit or credit cards are not included. Jewellery and other valuables are covered, but subject to ceilings. Some policies specify that the cover for jewellery will not exceed 25% of the total contents insurance cover sum insured or `1 lakh, whichever is lower. The individual responsible for the theft is also critical to the claim getting passed. "If the contents have been stolen by a relative or a household help your claim will not be admitted," says financial planner Pankaj Mathpal. When covering appliances and gadgets, ascertain the cost of replacing the item. An item is insured for its market value after depreciation. The insurance company will pay the amount required to restore an item to the condition it was in before damage.Simply put, a refrigerator or an airconditioner might have cost you `40,000 about five years ago, but its depreciated value will now be Rs 20,000-22,000.