It’s March again.
Scary? Buy Why? What so new in the month of March? It comes every year after February.
Don’t get me wrong. Ask any salaried class. She/he will explain why March used to be scary.
The season for filing annual tax returns!!
Along with this, salaried employees in India having the gross annual salary above Rs.2.5 lac are required to furnish tax saving investments details for FY 2015-16 to their respective HR department in order to avail tax deductions benefit under various sections of the Income Tax Act, 1961.
There is the various alternative choice available to an individual investor relating to instruments for tax saving investments and it is always wise to plan in advance for such savings. However, the problem lies with most of us is that of the choice. Choosing instruments that save tax and giving high returns with the capacity of beating inflation is a challenge for all of us. The present article deals with such challenge and suggests for two investment options.
Thus, to mitigate this challenge, let’s consider these two investment options that may help in saving tax and generate good returns –
Equity Linked Savings Schemes (ELSS)
Unit-Linked Insurance Plans (ULIPs)
These two investment options serve tax saving with income
Tax saving through Equity Linked Savings Schemes
Equity Linked Savings Schemes popularly known as ELSS are among the various alternative wealth creation instruments which save taxes as well.
- Have low lock-in period of 3 years and offer growth potentials along with good liquidity.
- Returns are in the form of long-term capital gains are tax-free.
- Returns are not guaranteed however, ELSS historically had shown some of the best returns among all other investment options.
- Lump sum investment or Systematic Investment Plan (SIP) are possible.
- Any dividend and capital gain on this investment are tax-free.
- Minimum investment can be started from Rs.500 and there is no upper limit to this investment.
- 1 lac 50 thousand every year is eligible for deduction under 80C of Income Tax Act 1961.
- In the case of long-term capital loss, the loss will have to be discarded from tax calculation because this loss cannot be set-off against any other income.
What should an investor do if interested in ELSS?
- If you want to average your cost of investment then opt for SIP mode.
- Want to claim the 80C deduction of Rs.1 lac 50 thousand for the financial year, go and invest in lump-sum up to Rs.1 lac 50 thousand
- In order to accumulate your wealth opt for growth option in ELSS
- Want to save cost with high return then opt for the direct plan of ELSS.
- Do not put all your investable fund in any one ELSS. Rather spread up your investment into a bunch of at least 4-5 good schemes, that you can figure out from next section.
Some equity-linked mutual funds with a good track record
There are a little over 100 ELSS mutual funds operational as in March 2017. Fourteen ELSS funds are such which have an AUM (asset under management) of over rupees one thousand crores. Twenty-nine schemes have AUM in between rupees one hundred crore and one thousand crores. Remaining sixty-eight schemes have AUM of less than rupees one hundred crores. Please note that AUM figure is that of December 2016.
While coming to the performance, forty-seven schemes had delivered over 20% return in 3 years period while thirty-three schemes managed to deliver returns in between 15% and 20% during the same period. In the last two years, only five schemes had registered a return of 15% and above while ten schemes in between 10% and 15% during the same period.
You can find the detailed list of all ELSS mutual fund schemes here.
ELSS mutual funds – March 2017
Also, you can do your own research on any of the mutual funds here.
Do your own mutual funds research
Tax saving through Unit Linked Insurance Plan
- Unit Linked Insurance Plan gives market linked returns with life insurance coverage.
- Tax saving through Unit Linked Insurance Plan Unit Linked Insurance Plans offer is a good route for making investments along with tax saving.
- These plans need to be in force for a minimum of 2 years for tax benefits under Section 80C of Income Tax Act 1961.
- Life protection cover is offered and the bigger benefit of these plans is that they deliver good returns as they are linked to the market. Returns from the Life ULIPs are tax-free, read it with Sec 10 (10D) of Income-tax Act. Among other features of this section is that any benefit under life insurance policies will be available only if annual premium payable should not be more than 10% of the sum assured.
- Sec 10 (10D) is imposed on ULIP as because there is Top-ups facility. You can use your surplus fund to invest in such plan apart from the yearly premiums.
- There is three choice available to you under ULIP, namely, debt, equity or balanced fund.
What should an investor do if interested in ULIP?
- If you are very risk-conscious then select ULIP that invests entirely in debts.
- If you are willing for higher returns and ready for the higher level of risk, then select from ULIP that focuses on equity.
- However, moderate risk lover and want some higher level of returns than that from fixed debt based ULIP then consider balanced funds.
- Again here also do not put all your investment in the single plan. First of all select 3-4 good plan from the various alternative.
- Bull-run and bear run are part of the market cycle. Add more to debt based plan when the equity market in the bull run while adding to equity-based plan when the equity market is bleeding to reap higher returns. But remember not to exceed yearly premium to 10% of the total sum assured in that year.
Some unit-linked insurance plan with a good track record
The ULIP list is long. Really long. So I prepared a list of under four head namely, insurance plan focused on long-term bond, short-term bonds, large-cap equity and small and mid-cap equity.
You can find the detailed list of all ULIP plan here.
ULIP plan – March 2017
Also, you can do your own research on any of the insurance plan here.
Do your own insurance plan research
How to select an ELSS or ULIP?
- Both ELSS and ULIP invests the corps collected in equities, which are inherently riskier among other forms of investment. However, with risk comes reward. Higher the risk higher the reward. So before considering investment in these instruments one must assay one’s own risk appetite.
- There are many ways through which one can select a suitable ELSS or ULIP for his her own portfolio for the dual purpose of saving tax and good returns. Some important considerations are discussed in below lines.
- Total AUM under a scheme is one of the many parameters on which you can choose the ELSS for your portfolio. Similarly, over 3 years of past returns is another such consideration before finalizing any scheme as ELSS have 3 years lock-in period which means that you can only withdraw/liquidate your investment after 3 years of your investment.
- Besides these, one must also look at the brand which is operating the funds. Here brand does include the fund’s manager’s past performance as well. A fund manager with higher years of experience maintaining funds with stable returns over years should be preferred to one with least experience or with volatile returns.
- The quality of stocks in the portfolio of a scheme which might be under consideration for putting your own savings is yet another good thing to look at. This will give you a sense of security as you will be in a position to know exactly where your own money is been put by these fund managers.
- Last but not least, must consider and compare charges of ULIP. Lower the charges, higher will be the premium amount allocation and will result in higher funds value. It is better to go for online ULIP plans for lower charge structure as middlemen/agent is eliminated from the selling process.