Investment and TAXATION..!!!

Investment and TAXATION are few words which are puzzling a few new hires. So let's get a basic idea of what is it all about and how the system works...

From the Budget 2008-09 tax exemption for working man is 1.5 Lakhs and for working women it is 1.8 Lakhs it . So your income is not taxed for this amount irrespective of one makes a investment or not.

While exemptions is on income deduction in the calculation of taxable income is allowed for certain payments under Section 80C (investments which are exempted from tax), Section 80D (Medical Insurance Premiums) and Interest on Housing Loans.

In this post let us discuss on few options in Section 80C since most of us would be interested in investments.The total limit under this section is Rupees One lakh. The investments or expenditure can be

• Contribution to Provident Fund or Public Provident Fund
• Payment of life insurance premium
• Investment in pension Plans
• Investment in Equity Linked Savings schemes (ELSS) of mutual funds
• Investment in specified government infrastructure bonds
• Investment in National Savings Certificates

Lets discuss about them but not insurance, let us not club insurance with investment.
"Insurance and investments must be mutually exclusive", will write about this in my later posts.

Contributions to PPF ( Public Provident Fund) and ELSS ( Equity Linked Savings Scheme of Mutual funds) are eligible for tax deductions.
PPF gives a return of 8% p.a. The most attractive part being the interest is tax free*. 15 years is the minimum term that you need to hold this account for. It definitely helps in compounding your money in such a period of time.

ELSS also generates tax free dividend (if you opt for dividend payout ) and the capital gains you make out of this scheme is also tax free*.
These two schemes definitely stand out of the rest in terms of tax saving schemes. Fixed Deposits, NSC ( National Savings Certificate ) since they do not enjoy tax free* returns.
ULIPs also enjoy some tax benefits.

So, When we compare PPF and ELSS , Equity is capable of generating greater returns in the long run( esp ..like PPF period of 15 years). So, if one is ready to lock in his money for 15 years or so, he can prefer equity based investments . ( ELSS have yielded 40% return in last 5 years # Same performance however cannot be expected year on year, but around 12% returns can make a huge difference!!! in a 15 year period).

Why you must have a PPF account?

1. Highest Return- 8% among the safest category of investment.
2. Only instrument that falls under EEE (Exempt - Investment amount, Exempt- Interest accrual ,Exempt- Interest pay out) category under Income Tax Act.. You need not pay a single penny of tax.
3. Power of compounding can act effectively as the investment period is for 15 years.
4. Tax exemption under section 80 C.
5. The Lock-in period keeps reducing as years go by

So Open PPF account even if you are wary of the 15 year lock in ….Keep investing the minimum amount every year and you can use it during the final years with a minimum lock in period!!

Happy Investing :-)