Tuesday, 28 December 2010

Investment for tax saving is a wise decision or not

Tax payers always try to pay less tax and it is legal that you can reduce your tax liability by proper tax planning. But most of the financial institutions and stock brokers offer high return for most of their financial products such as mutual funds, Ulips and high return investments. In this situation most of the tax payers are in a dilemma that whether they have to invest in tax saving investments or pay tax and invest in any other high income investments. Let us compare the tax saving and other investment options with this concept.

As per the present income tax rule one can get tax exemption of Rs. 100000 under section 80C of the investments in Tax saving Fixed deposits, PPF (Public Provident Fund) , NSC (National Saving Certificate), ELSS(Equity Linked Saving Scheme - Mutual Fund), Principal amount reimbursement of Housing loan, LIC (Premium of Life Insurance) , Tuition Fee for children etc.

And another Rs. 15000 – 20000 in Medical Insurance for self, spouse and children and another 15000 -20000 for the medical insurance of parents (Rs. 20000 if any one or more of the insured is a senior citizen) under section 80 D. Interest of home loan up to Rs. 150000 is the main exemption.

Out of the abovementioned exemptions a major portion of exemptions under section 80 C are investments. All those investments except ELSS are fixed income investments and most of them attract an interest of 8% to 9% and the interest from PPF is tax free also. Now let us examine the various fixed income tax saving schemes and its benefit with saved tax and also can compare with other non tax saving investments.

First we can take Public Provident Fund (PPF) which has 8% tax free income. (Study with Rs. 10000 for a sample study) The 10% Tax payers get 19% profit in the first year, 20% tax payer’s get 30% and 30% tax payers get 41% profit in the first year (See the Chart Below)

For any other tax saving scheme the 10% Tax payers get 17% profit in the first year, 20% tax payer’s get 27% and 30% tax payers get 37% profit in the first year.(See the chart below. Assumed that interest is 8% per annum)

PPF



















































Tax Brackets10%20%30%
SchemePPFPPFPPF
Amount Invested100001000010000
Tax Saved103020603090
Interest (first Year)800800800
Tax Of interest (not to pay)82165167
Total Profit (First Year)191230254057
% Profit (First Year)193041

Other Tax saving scheme except PPF













































Tax Brackets10%20%30%
Amount Invested100001000010000
Tax Saved103020603090
Interest (first Year)800800800
Tax Of interest (payable)-82-165-167
Total Profit (First Year)174826953723
% Profit (First Year)172737

The 10% Tax payers get 17% profit in the first year, 20% tax payer’s get 27% and 30% tax payers get 37% profit in the first year.

If you deposit in any non tax saving scheme such as mutual funds, shares etc., instead of saving your tax, you cannot guarantee this much profit because the profit is not sure due to high risk rate. Even if other saving schemes give you more benefit, do not avoid tax saving schemes, because these tax saving schemes offer you an assured return as per the above mentioned percentage. Other financial investments give you high return, but not sure. IT may or may not be more than this tax saving schemes or less. So first you think about tax saving schemes and get maximum benefit out of it and then you turn to other financial instruments. Investment and money matters wish you a prosperous and profitable new year 2011 for all our readers.

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