Tax Time

January is here and HR department of your company would have sent by now emails asking for proof of tax declarations that you made in the beginning of the financial year.

Since most of us a love to wait till the last minute to make any investment for the purpose of saving any tax we are caught unaware by these emails and haphazardly make investments which may not fit in our long term financial goals. So we may end up buying products that are either totally ill suited for us or do not match our risk profile.

Relying on the expert advice of your LIC or mutual fund agent is not a very good thing. As we have seen in the Citi bank case the financial adviser may have his own interest in mind rather than yours.

So what to do?

I am giving below some simple steps that one needs to follow to reach to the right product selection for the purpose of tax savings. Please remember these are generic steps and the actual financial decision you should take after proper calculations and keeping your personal circumstances in picture.

1. Check with HR/Finance department how much you need to invest. You may have received an increment since last year or have added some other source of income which could be taxable e.g interest from the FDs, rental income etc.
2. Decide for how long you want to invest. If you want to invest for less than 3 years then you are out of luck as no tax savings product has a lock in period of less than 3 years. So if you need the money in next 3 years forget the tax savings and put the money in liquid, low risk product like FD or debt mutual fund. Don’t even consider equity or equity linked mutual funds for the same.
3. From the total amount you need to invest reduce the total investment already made e.g any insurance premium that you have already made, any EPF contributions that you are making through your employer. Any donations that you may have made that will be reduced from the total income. ( Please check with your finance department if they will allow the credit in form 16 or you have to get it in you tax return)
4. Now you will have the total amount that you need to invest in the tax savings products.
5. Calculate any prior commitments that you may have for any tax savings instrument like LIC or other insurance policies. This will get subtracted from the total amount.
6. Now say you have 40K to be invested further in the tax savings products.
7. Check if you are adequately insured. If there are insurance gaps in your portfolio first thing you should go amongst the tax savings instrument is to go for a cheap online term insurance.
8. If still some amount is left and you are willing to invest then go for Tax Saving Equity funds. If you are not willing to go for Equity schemes you can go for other instruments like NSC etc. But normally they should be taken only in the end once your insurance, PPF and Tax savings equity schemes have been covered.
9. Once you have 1lakh Rs invested and you still have some more tax obligation you can then look at Infrastructure bonds where you can invest another 20K over and above the 1L limit in normal tax saving instruments.
10. Do not invest in tax savings instruments more than you need to, because you will not get any additional tax benefit and your money would be still locked and not available to you during the locking period.
11. Collect the receipts for all investments and submit the photocopies to your companies finance/HR department.

By falling these simple steps you can ensure that you get adequate tax savings and invest in the right instruments that fit in your long term financial goals

Thanks for reading.

Gentlemen Prefer Bonds

An old wall street saying is that “ Gentelmen Prefer Bonds” shamelessly copied from the Marylyn Monroe movie “ Gentlemen Prefer Blonds”.

But one must wonder today when Dalal Street is moving to new highs every week should one shun the roller coaster ride or equities and go to the calm backwaters of bonds?

The reason to raise this point at this stage is the current issue of IDFC Infrastructure bonds. For last few years nobody has talked about infrastructure bonds but this year again they are in vogue.

This year upto 20,000 Rs are allowed to be invested in Infrastructure bonds and the investor gets a tax deduction on this amount which is over and above the current limit of Rs 100,000/- per annum.

Now the question is should you be investing in these bonds ??

Time and again I like to remind myself and my readers is that this blog is not an advise blog to others as in personal finance each one of us has totally different aspirations, and risk taking capabilities. The main purpose of this blog is to share my experiences with my readers, and the reason I took or plan to take certain decisions, what you do with your money finally depend on you. No point in making your own mistakes when you can learn from others.

Coming back to the heading for this article: “Gentlemen prefer bonds”, clearly denotes that bonds are for people who are not comfortable with the daily fluctuations in the equity market and prefer the predictability of steady returns from the bonds.

The advantage of investing in the IDFC bonds will be only if you have or will be exhausting your 100,000/- per annum in tax saving instruments. Most of us will have some insurance policy, EPF and or PPF children school fees etc. If these itself are not reaching to 100000/- then there is no point in investing in the IDFC bonds as you do not get any additional benefit, but if you have or will be exhausting the 100000/- Rs limit then you can look at the bonds.

I will not like to go in the details of how much return you will get from the bonds as all these things you can get from IDFC website.

Let us talk about broader picture.

1. Your money will be blocked for 5 to 10 years depending on the option you take.
2. Equity is expected to beat bonds over long term and 10 years is pretty long.
3. Interest rates today have an upward trend.
4. This is the first Infrastructure bond issue of the year and we may be getting some more in next few months.
5. The future infrastructure bond issues may have slightly higher rate( this is wish not a fact)

So to summarize if you are willing to wait for 5-10 years and are ok with locking the current rate of interest without waiting for any further issues, and have exhausted your 100,000/- limit in other tax saving instruments the go for the same. If any of the above questions have an answer as no then you should skip the issue.

Thanks for reading, do leave your comments.