Invest Zero to get Tax benefits under Sec 80C

Yes- Invest Zero- meaning nothing additional from your cashflow to make full use of your Rs 1.5L of Tax saving investments.


Its an interesting concept- applicable to both PPF as well as an Equity Linked Saving Scheme ( ELSS).

The ELSS is a scheme where one can invest towards the tax saving limit- but the funds are locked in for the next three years. At the end of three years from the time of investment, one can redeem the units tax free ( since equity investments for more than 1 year are tax free). If one has invested via a monthly SIP- then the withdrawal of the units also would need to monthly as the time of three years is met.

Now, very simply- one can withdraw the amount and re- invest into the ELSS again showing that a new investment has been made and hence no "additional" funds need to be utilized to obtain the tax benefits.  The good thing is that there is no Entry load into these ELSS funds- which means - what comes out and fully go in!

This of course has a very significant impact on you cash flow which can then be utilized towards repayment of home loan EMI etc.

The similar strategy can be followed on PPF- though the rules are a bit different. One can only take out a % of the overall amount 3-4 yrs prior.

Please remember- the above example is a cash flow initiative- there is a significant downside to the savings angle when you keep taking out from your "investment " kitty.

Its a give and take and a useful strategy towards Cash Flow..

what you do with it - its your choice.

that's why this is simplefinancialsense.

 

Retirement solutions

Lots of advertisements on retirement solutions now on the TV. I just saw one from birla sunlife and one from hdfc.

These become a lot more frequent when march approaches - because of tax planning.

Most retirement plans are very very conservative. I actually bought a birla platinum plus series 3 ulip almost 5 years back and am still waiting for my money to break even.

When you invest look for who the fund manager is and look for his credentials.

Understand the risks that the fund takes or doesn't take and then understand what money you will or will not make.

When you see the returns - understand that you will need a lot more than what you are expecting as of today. Use the time calculator on this blog to find out what you will really need.

Take care... happy investing

IDFC bonds- part 2

IDFC has re issued its infrastructure bonds which has a tax benefit of upto Rs 20,000 which is over and above the Rs100,000 of the 80C section.

Last year IDFC had come out with a similiar bond however which was at a lower interest rate of 7.5% ( here is the previous post on this - LINK)

This time the interest rate is 8% per annum. The investment will be for a period of 10 years and one of the good things about this is that this will be also available in demat form- so no need of ensuring that the paperwork is safe and sound for 10 years. ( You can still avail of the physical copy of the bonds if you so desire).

Most banks and brokers are accepting the money and the forms. You can go to the following link to see which all banks/ brokers or where you can actually invest online.
http://idfc.com/infrastructure-bond/distributors.htm

Does it make sense?
Yes it does.

At an 8% coupon rate you save 30% tax if you are in the top most bracket  which means that you reduce your tax liability by 6000Rs when you invest 20,000 which is the maximum for the tax benefit.

This implies that the pre tax return that you will get is 8/0.7 =11.42%

Compared to an FD this makes a lot of sense.

Now if you are planning to invest more than 20,000 Rs - you can. However as i mentioned before that there is no tax benefit over Rs 20K and there are FD's available in the market which give much better pre tax returns ( IDBI has a 9.25% per annum scheme).

The last date is Feb 4th.

Go ahead- Apply for it

Happy Investing

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Other similiar links
http://simplefinancialsense.blogspot.com/2010/10/idfc-bonds-do-apply.html
http://simplefinancialsense.blogspot.com/2010/07/titans-gold-harvest-scheme.html

IDFC bonds-- Do apply.

IDFC ( Infrastructure development finance corporation) has recently come out with tax saving bonds. One can apply to these bonds till the 22nd of October.

I was actually a little bit surprised at the number of television advertisements that came out on this bond, and even more with the fact that they were quite creative. I especially like the one where a guy stops his friend from spitting on the road ( yes, we still do that here in India) because it was his highway and he had invested in the IDFC bonds.

But personally i think it is a good idea to apply to these bonds. The reasons are as follows.

1. These bonds give you tax savings over and above the Rs 100,000 limit on tax saving in 80C to another Rs 20,000. So , if you invest and if you are in the top most bracket of 30%, this is a cool saving of Rs 6000.
2. The coupon rate is 7.5% which when you get back the income earned on it is taxable.
3. This will sit in your demat account, which is good since you dont need to keep some paper safely for 10 yrs!
4. There are two options- five years and ten years. The coupon rates are a little different though.


Lets do a little calculation

lets assume that you are investing 20,000 Rs for a period of 10 yrs. Which means that you are now saving Rs 6000 Rs . which is 600 Rs over each yr for the next 10 yrs.
The interest income yearly ( non cumulative) is 7.5% which translates to 1500 Rs/ year . Hence the overall saving that you get is 2100 Rs ( 1500+ 600) which is pre tax rate of 10.5%.

This means that your post tax rate is actually at 10.5% *( 1-30%)= 7.35% which is actually quite a good 100% gaurenteed risk free rate of return.

Makes sense to invest in this as long as you get the tax benefit , which is upto a maximum investment of Rs 20,000. If you invest more than that then the post tax rate drops to 5.25% which is quite low.


So  go ahead make the investment into these bonds on the following conditions.

1. You have maxed out the 80C limit of Rs 100,000

2. You want debt in your portolio

3. Upto a maximum of Rs 20,000

You will need a demat account to apply for these bonds , as well as a PAN no. ( else how will you claim the tax benefit?). Most of the banks are accepting these bonds - i know i have gotten emails from Citibank as well as HDFC. I am sure they are being paid some good brokerage fees on this!

Go ahead, Make the investment!

Happy Investing

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