Budget Expectations 2014: Make it more savings & investment friendly!

With the new NDA Govt., with new Prime Minister, Finance Minister and other Ministries, lots of expectations have developed. In this year’s Union Budget, I would expect to see something in the box that would benefit middle-income group of people. The benefits could be modifying certain tax laws that allow tax deductions, which can encourage savings habit and help them take exposure to different asset classes.

EPF contributions investment decisions should be left to the employee
A certain percentage of our salary is contributed (by employee as well as employer) to the Employee Provident Fund (EPF), which earns a fixed rate of return; the interest rate is declared every financial year. But, in the U.S. for such kind of employee contributions plan; the employee has the right to choose instrument / asset class where he wants his contribution should be invested. Similarly in India too, I feel each employee should have the right to decide specific investment instrument, where he would want the monthly contribution to be invested. It can be either Equity or Debt, or a combination of both, the option should lie with the employee. Special Equity funds should be developed just like how we have Equity Funds in NPS (National Pension System); and as far as Debt is concerned a fixed Interest Rate option should be available, which is available today to everyone. The employee should also be given the right to change his asset allocation, after a certain period – say every 5 years, since the asset allocation should change, as you grow older and your risk taking capacity decreases. This will encourage lot of salaried class people to take at least some exposure of Equity. This can promote investments in Equity markets.

Increase limit u/s 80C
Tax deduction u/s 80C is one of the best ways, by which an individual makes certain investments just to save tax. Tax saving u/s 80C is like a mandatory savings for most of people; very few people ignore to claim full deduction u/s 80C. Lot of individuals in first slab of income tax, are barely left with any surplus for investing for investing for their financial goals; over and above Rs.1 lakh investment (including certain allowable expenses). If the limit u/s 80C is increased, it will encourage people to save more and invest in tax savings investment instruments to claim deduction u/s 80C and claim tax deductions. Whether an individual invests in 5 Year Tax Savings Fixed Deposit, PPF, ELSS Fund or any other eligible investment instrument, it at least inculcates a habit of saving and investing. It is very difficult for a person to reduce the regular household expenses, to increase the surplus for saving and investing. But increase in the limit u/s 80C will automatically motivate people to save more just for the tax benefit and reduce his other expenses in some manner.

Introduction of REITs
Lot of middle-class people cannot take exposure to real estate since it’s a lumpy investment and requires large one time payment. Just like with the help of Mutual Funds, investors can take exposure to Equity shares listed in the stock market; with the help of Real Estate Investment Trust (REITs) investors can take exposure to Real Estate. Different categories of REITs allow the investors to choose the type of property (i.e. residential, commercial, etc.) where he wants to invest. Not only it will help investors to take exposure to real estate, but will also help to regulate the Real Estate market since the REITs should be listed, reduce cash transactions and thus the circulation of black money in the Real Estate market.

Tax deduction for interest on home loan on self-occupied property
Today, if you take a home loan and you let it on rent, then the entire interest payment towards the home loan is available for tax deduction u/s 24B. But, if you take a home loan and it is self-occupied i.e. you stay in that house, then only upto Rs.1.50 lakhs interest on home loan is available for tax deduction in a financial year. Why should the property given on rent get higher tax benefits compared to the property, which is self-occupied? The person self-occupying the property has taken home loan for his need, unlike an investor who has taken the home loan for leveraging and put property on rent just as an investment. So, I think this section should be the other way round and should be altered; tax deduction of full interest on home loan should be given for self-occupied property and a limit should be placed for tax deduction for interest paid on home loan for let-out property. The alteration of this tax law will not only benefit to the needy people who take a home loan for one of their basic need (Makaan), but also control rising the real estate prices, since it will discourage the wealthy real estate investors who leverage, for claiming tax benefits.

Published in: Moneycontrol.com

Link your Tax Planning to your Retirement Planning Goal

Season for tax savings has already started; you will have to submit investment declarations for the current financial year to your employer to save tax. You must be panicking for investing to save your taxes. Why should you wait till end for tax planning?

One way to have disciplined tax planning is to link your tax savings investments to your retirement goal. The idea for linking tax planning to your retirement goal is important since all the tax savings instruments have a lock-in period of 3 to 15 years. Firstly you should calculate the required inflation adjusted retirement corpus depending on your current household and heath insurance expenses. Once you have calculated your required retirement corpus, you should calculate the required monthly investment to accumulate the desired corpus and then start investing which should depend on your risk profile and time remaining for retirement.

Looking at the long-term nature of investment that can be linked to your retirement, here are some of the tax savings instruments that you can choose:

PPF

Public Provident Fund is one of the best debt investment instruments with tax benefits and attractive rate of interest. It is a long-term investment, since you have to hold it for a minimum period of 15 years. Partial withdrawals and loans are allowed in PPF, though only upto certain percentages of your PPF balance in a particular year. Since, the liquidity is poor, you cannot allocate it for short-term goals, and thus it is suitable to allocate it for your retirement. The Government declares the rate of interest of PPF every year. Current rate of interest for financial year 2013-14 is 8.70% p.a.

EPF

Employee Provident Fund is one of the most disciplined ways of savings, since the contribution to EPF is made directly from your gross salary. You as well as your employer makes equal contributions in the EPF account. Just like PPF, EPF also has poor liquidity since there are some restrictions on withdrawal from EPF account. Your EPF account is active till you are working and regular contributions are made. So, it is advisable that you don’t touch the money in EPF and hold it till retirement. It serves as a cushion for retirement along with your other savings for retirement. The Government declares the rate of interest of EPF every year. Current rate of interest for financial year 2013-14 is 8.75% p.a.

ELSS Funds 

Equity Linked Savings Scheme (ELSS) funds of Mutual Funds have the shortest lock-in period of 3 years. ELSS funds have major exposure to equity. Though the lock-in period is only for 3 years, you are advised to invest in ELSS funds only if your investment time horizon is at least 10 years. It is one of the best instruments for taking equity exposure with tax benefits. You should always invest in ELSS funds via SIP, just like you invest in equity-diversified funds. Since ELSS funds are market linked, they are highly risky with higher returns and have the capability to beat inflation. Thus, it can help you built a healthy retirement corpus. You should review your portfolio periodically, though you will not to able to switch or redeem before the lock-in period, but you can at least stop your existing SIPs of non-performing funds and start fresh SIPs in performing funds.

NPS

In National Pension System (NPS), you can claim tax deduction only under Tier I account. You have two options under NPS, ‘Active’ and ‘Auto’ option. Under Active option, you have the choice to select investment proportion in Equity, Fixed income instruments other than govt. securities and Central Govt. and State Govt. Bonds. Under Auto option, there is fixed schedule of investment allocation as per your age group. You need to compulsorily deposit a minimum Rs.500 per contribution and Rs.6,000 per financial year; and minimum four contributions per year. Thus, investing in NPS helps you invest regularly. Only issue with NPS is you can withdraw only upto 20% (before age 60) and 60% (after age 60) of the accumulated funds in your NPS account, the balance amount should be compulsorily utilized to buy immediate annuity. The pension / annuity receivable is taxable as per your tax slab rate. Thus, NPS is not recommended from tax perspective.

You should invest in a mix of these instruments depending on your investment time horizon and your risk appetite. Younger you are higher is your ability to take risk, and thus higher should be your investment in ELSS funds. You can avail tax deduction upto Rs.1 lakh under section 80C. But retirement planning is not restricted to Rs.1 lakh that you invest to save tax under section 80C; you should invest the additional required amount required to accumulate the corpus in other investment instruments. Allocating tax savings investment to your retirement goal helps you maintain discipline for investing under 80C. With this you can design your financial life with two-in-one benefits Tax Planning with Retirement Planning!!!

Published in: Moneycontrol.com, The Tribune

Budget Expectations: Increase Deduction, Decrease Tax

Every year people wish that budget brought some good news for them. Most of the retail investors / individuals eye upon taxes and the deductions, which help them to save some amount of tax. Over the years, we have seen the amount available for deduction has remained the same. My recommendations for this year’s budget would be:

Deductions under Chapter VI-A

Section 80C:The present deduction available under Section 80C is upto Rs.1 lakh only. This limit is in force since 5-6 years. Considering the increasing inflation over the period, the limit should be revised and increased. The expenses allowed for deductions available under the section have also increased.

Principal amount of home loan and Stamp Duty charges:

We have seen real-estate prices have risen. Since the prices of residential houses have increased, so has the amount of home loans people are taking. So eventually, the principal amount, which is being repaid, has also increased. Also the increasing stamp duty and registration cost due to increase in real estate prices can be availed for deduction.

Tuition fees:

The education cost is also increasing day-by-day. The people must benefit from the deduction as the education expenses (school fees) for their children is very high. So the available deduction under 80C must increase.

Public Provident Fund:

Also, after increase in the limit in maximum amount of deposit in Public Provident Fund (PPF) has increased to Rs.1 lakh and so has the current rate of rate of interest to 8.80% p.a., conservative investors are willing to invest more in PPF for taking the benefit by investing in PPF.

Equity Linked Savings Scheme (ELSS):

With increasing financial literacy, investors have started investing in mutual funds. ELSS was one of the routes and the reason people started investing in mutual fund. Also the Nifty and Sensex gave annual return of around 26% in calendar year 2012. So, this can attract investors to invest in equity market. I feel instead of continuing RGESS, if the deduction under 80C is increased, people may invest more in ELSS funds, since ELSS is the only scheme u/s 80C which has shortest lock-in period and can provide highest return in the long term.

80CCF:

This section was introduced in the year 2001, which allowed a deduction upto Rs.20, 000. The deduction was available for investment under infrastructure bonds. The deduction was not available in the last financial budget. Most of the retail investors used to invest in these bonds for availing the deduction and as a fixed income investment. Also, it was a great source for Infrastructure Company to raise funds, which would help them to build better infrastructure of the country and which would eventually benefit the growth of the country.

80CCG:

This section was introduced in the last financial budget, which allowed a deduction upto Rs.25,000 for investments upto Rs.50,000 in specified schemes or shares under the Rajiv Gandhi Equity Scheme. The motto of the scheme was to pool investors to invest in equity market. This was not very much successful due to the complication and eligibility criteria of the scheme. So, instead of continuing this scheme and the deduction amount under this scheme, it would be better to increase the deductible amount under section 80C or bringing back section 80CCF.

So, if the tax deduction amount will increase, should increase looking at the increasing expenses due to inflation. Lot of retail individual taxpayers will wish to avail a higher deduction and save tax.

Published in:  Moneycontrol.com