A maturing market amid the mayhem
Tax saving with safety locked in
Years back, while on a trip to Jaipur, I had run into a rather energetic man who insisted on jumping the queue at the post office. When requests failed, I asked him why he was in a hurry.
“I have a savings account here,” he said proudly in Hindi, clutching a dog-eared booklet with currency notes tucked in. Ram Prasad, the 42-year-old cycle rickshaw driver had his way and left flashing his stained teeth.
Outside, he offered me a discounted tour of the city, with unsolicited advice on why I should park my funds in the post office. The stock market was hot that year and I brushed aside his guidance.
I bumped into him again last year outside the Pink City railway station. He showed me the new auto rickshaw he had bought with years of intelligent investing. Ram Prasad, I realised, had been a winner all these years. The market had gone into a tailspin, eroding millions of rupees of investor money, within months of the global financial crisis unraveling.
Reading the signposts is a must and interpreting them correctly is what can make or break. Singed by the financial crisis and corporate misadventures, small investors scrambled for safe yet decent returns. Suddenly, they had found the silver lining in bank fixed deposits (FDs) and government-backed saving schemes.
Coincidentally, the freeze of credit markets in October has forced banks and corporates to raise money at high rates. Bane for one could be a boon for another. Amid gloomy days, small investors now have a bounty of options to park their hard earned savings in debt offering as high as 10.5 percent.
While bank FDs are safe, those of corporates come with risk of default. Currently, bank FD rates for one year range from 8 percent to 10.5 percent. Though the rates are attractive, taxation and inflation, as always, eat into the gains.
Offering lesser returns but top on safety are short-term, government-backed investment schemes. Be it post office investment plans or bonds, the chances of you losing your money are nil since the government stands guarantee. Post offices offer saving instruments with guaranteed returns of 6.25 percent to 9.0 percent under several schemes. While gains here may not be comparable to the high returns in equities trading or mutual funds when the market is on an upswing, they definitely provide the safety that middle- and low-income group households require.
Most of these saving instruments fall under medium- to long-term plans (five years and above) which, besides offering modest returns, are also useful tools for saving tax. These plans come under Sec 80C, 80CCC or 80D of the Income Tax Act, 1961.
Those under Sec 80C include bank and postal FDs (5-year lock-in), life insurance plans, Public Provident Fund (PPF), National Saving Certificate (NSC), equity-linked savings schemes (ELSS), infrastructure bonds and unit-linked insurance plans (ULIPs). Investments here get deducted, up to Rs 100,000, from the gross total income of a person.
While PPF, which carries a maturity period of 15 years, offers a tax-fee interest rate of 8 percent, NSCs have a lock-in of six years and offer an interest rate of 8 percent (compounded quarterly) with the entire interest being taxable.
Another attractive instrument is the RBI’s Government of India Bonds, which it issues periodically. It carries a five-year maturity period and the interest is tax-free.
Infrastructure bonds, like the RBI bonds, are also issued periodically.
Some others worth mentioning are Life Insurance Corporation’s short-term guaranteed plans and pension plans. Premium for pension plans qualify for rebate under Sec 80C.
These instruments may not offer dream returns, but are definitely a safe bet for investors worried about missing the March 31 deadline for saving tax. What is more important — investing in risky assets and losing sleep, or going for a safe bet? The choice is yours. And if you are unsure, there’s always the World Wide Web to offer comfort.