ELSS - an efficient tax saving tool

Equity Linked Savings Scheme(ELSS) is a kind of mutual fund. It can be considered as a diversified equity fund with tax benefits. Under Section 80C an  individual can claim tax deduction by investing a maximum of Rs. 1 lakh in ELSS.

                              

                 Advantages of ELSS  are:

                Lock in period is only 3 years while other tax saving instruments are having longer lock-in period.  NSC - 6 years,  PPF -6 years, Bank FD - 5 years. 

               

                Dividend option is available.  If opted, the investor will get periodic dividends. Most of the fund houses declare dividends annually. Some funds offer dividends even twice a year. By using this option the investor can unlock a part of his investment even before the lock-in period. Another benefit is that dividend is not taxable.

   

                Earning potential is high.  Since the investments are made in the stock markets, the returns will depend on the performance of the stock market.  Equity is the only investment which can beat the inflation. Even though there is a market risk, the returns will be maximized and the losses will be minimized by the skill of the fund manager.  Top 10 ELSS  have given 17% -23% returns for the last one year.  NSC and PPF offers 8% returns only  while 5 year Bank FD offers 8.5%. 

    

                 Returns are not taxable.  Returns from ELSS are treated as long term capital gains and they are not taxable. But returns from NSC and Bank FD are taxable.

                  

                 SIP is available.  The investor can select  Systematic Investment Plan (SIP) route for investing in this fund. The minimum amount of SIP is Rs.500 only.

    Performance of Top 10 ELSS funds are given below:  (NAV as on 25.1.2011  )

Rank	Scheme	Date	Performance
			1 month%	3 months%	6 months %	1 year %
1	Fidelity Tax Advantage Fund - Growth	Jan 25, 2011	-4.25	-7.50	4.21	23.44
2	Quantum Tax Saving Fund - Growth	Jan 25, 2011	-4.07	-5.70	7.45	22.67
3	Axis Tax Saver Fund - Growth	Jan 25, 2011	-3.95	-6.32	5.12	22.43
4	HDFC Long Term Advantage Fund - Growth	Jan 25, 2011	-5.42	-7.15	6.13	21.71
5	HDFC Taxsaver - Growth	Jan 25, 2011	-4.36	-8.22	3.65	19.83
6	JPMorgan India Tax Advantage Fund - Growth	Jan 25, 2011	-5.27	-6.54	5.00	19.46
7	Canara Robeco Equity Taxsaver - Growth	Jan 25, 2011	-3.66	-7.99	1.42	18.89
8	ING Tax Saving Fund - Growth	Jan 25, 2011	-5.08	-7.22	4.41	18.19
9	Sahara Taxgain - Growth	Jan 25, 2011	-3.59	-10.08	2.17	17.90
10	Franklin India Taxshield - Growth	Jan 25, 2011	-4.19	-6.14	5.82	17.83

 

Infrastructure Bonds: A new avenue to save tax

If you have exhausted the Rs.100000 limit under section 80C, don't worry; there is another avenue to save tax.  A new section 80CCF was introduced in the 2010-11 budget. Under this section an investment upto a maximum of Rs. 20000 in infrastructure bonds would be deductible from your taxable  income. This deduction of  Rs.20000 will be over and above the Rs.100000 limit of deduction available under section 80c,80ccc and 80ccd. 

       

                Long term infrastructure bonds will be issued by

IFCI- Industrial Finance Corporation of india
LIC - Life Insurance Corporation of India
IDFC - Infrastructure Development Finance Company 
NBFCs classified as Infrastructure Finance Company by RBI .
                                     
These  bonds will mature after a period of  10 years. But the investors can exit from the bonds after the 5 year lock-in period.IFCI bond is now closed for subscription.  Only IDFC infrastructure bond and REC infrastructure bond are currently open for subscription.  The IDFC bond  issue closes on  February 04, 2011.  The REC infrastructure bond isssue will close on March 28, 2011.  

                                                   These bonds offer  a yield of 8% compounded annually.

For details about REC infrastructure bonds  click on http://www.recindia.nic.in/infra.html

                     For  IDFC infrastructure bonds click on http://www.idfc.com/infrastructure_bonds.htm

Famous Quotes by Warren Buffet

 "A public-opinion poll is no substitute for thought. "
  
"Americans are in a cycle of fear which leads to people not wanting to spend and not wanting to make investments, and that leads to more fear. We'll break out of it. It takes time. "
  
"Beware of geeks bearing formulas. "
  
"Chains of habit are too light to be felt until they are too heavy to be broken. "
  
"Derivatives are financial weapons of mass destruction. "
  
"Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation."
  
"I always knew I was going to be rich. I don't think I ever doubted it for a minute. "
  
"I am a huge bull on this country. We will not have a double-dip recession at all. I see our businesses coming back almost across the board. "
  
"I am quite serious when I say that I do not believe there are, on the whole earth besides, so many intensified bores as in these United States. No man can form an adequate idea of the real meaning of the word, without coming here. "
  
"I buy expensive suits. They just look cheap on me. "
  
"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over. "
  
"I just think that - when a country needs more income and we do, we're only taking in 15 percent of GDP, I mean, that - that - when a country needs more income, they should get it from the people that have it. "
  
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. "
  
"I think the most important factor in getting out of the recession actually is just the regenerative capacity of - of American capitalism. "
  
"If a business does well, the stock eventually follows. "
  
"If anything, taxes for the lower and middle class and maybe even the upper middle class should even probably be cut further. But I think that people at the high end - people like myself - should be paying a lot more in taxes. We have it better than we've ever had it. "
  
"If past history was all there was to the game, the richest people would be librarians. "
  
"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. "
  
"In the business world, the rearview mirror is always clearer than the windshield. "
  
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently. "

TAX PLANNING in INDIA

  "The only things certain in life are death and taxes.”  is  a famous quote by Benjamin Franklin.  There are innumerable quotes like this about tax. Here is another one from Albert Einstein, “The hardest thing in the world to understand is the income tax."
 "Death and taxes may be certain, but we don't have to die every year." -- Unknown.

Even though the income tax rates and allowable  deductions  are published in the Finance Act   well  before the beginning of the Financial Year, there will be a mad rush by the taxpayers/tax assesses  at the fag end of the financial year to buy  tax saving instruments.   These hasty decisions may force them to park their hard earned money  into schemes which are illiquid or with low return.  It can be avoided  by early  tax planning.  

     Let us take a look at the Income Tax slabs  and   Income Tax exemptions under various sections of Income Tax Act and Finance Act 2010.

Income Tax Rates for male resident individual   below the age of 65

           Assessment Year 2011-12 (FY 2010-11) 

                       Income                           Tax Rate

                Upto Rs. 1,60,000                  Nil.

Rs. 1,60,001 to Rs. 5,00,000                10 %

Rs. 5,00,001 to Rs. 8,00,000                20 %

              Above Rs. 8,00,000               30 % 

            for female resident individual   below the age of 65
                             Income                      Tax Rate

                 Upto Rs. 1,90,000                  Nil.

Rs. 1,90,001 to Rs. 5,00,000                10 %

Rs. 5,00,001 to Rs. 8,00,000                20 %

              Above Rs. 8,00,000                30%

                 For Senior Citizens
                       Income                      Tax Rate

               Upto 2,40,000                       Nil
              2,40,001 to 5,00,000             10%
              5,00,001 to 8,00,000             20%
              Above 8,00,000                    30%

Deductions are allowed from income  under the  following Sections.

Section 80C

  We can claim a maximum deduction of up to Rs. 1, 00,000 under section 80C.  The various investment  options available under this section are :

          Life Insurance Premium.
          Employees Provident Fund

          Public Provident Fund.          (Maximum.70000)

          National Savings Certificate.

          5 Year Fixed Deposits with banks and post offices. 

          Tuition Fees paid for children's education.
          ELSS- Equity Linked Savings Schemes (Tax Saving Mutual Funds)


SECTION 80CCF
                    Additional investment of 20000 in infrastructure  bonds over and above Rs 1 lakh in 80C

Section 80D
         Health Insurance premiums.   max. 15000.  for senior citizens - 20000.
            Another 15000 is allowed for buying health insurance for parents. (20000 if any of them is senior citizen).
Section 80DD
          for medical treatment of handicapped dependents.  50000 or actual expenses whichever is lesser.


Section 80DDB
                for treatment of specified diseases:    max. 40000, for senior citizens  - 65000
                           neurological diseases.
                           Parkinson's disease.
                           malignant cancers.
                           AIDS
                           Thalasaemia
                           chronic renal failure
                           haemophilia


                        
                        
Section 80E
             Interest paid on educational loan.  No maximum limits.

SECTION 80GG
                      HRA exemption

SECTION 24
                 Interest repayment on housing loan. max.150000.