Few remandings regarding Tax Planning. Series :1
It is again the time to file your income tax returns and look at your portfolio of tax savings. We are very lazy since every time during this period of Jan to March we plan about tax saving. We have grown the habit of eleventh hour planning. I will start on with the best avenues of tax saving rather making my sermon to be lengthy and boaring. ELSS (Equity Linked Saving Schemes) are one of the best among all tax saving instruments. ELSS have the lowest lock-in period when compared with other instruments like PPF (15 years) and NSCs (six years).
Investments in an ELSS should be done in a disciplined, systematic manner throughout the year .It is better if one goes for diversification regarding investments in ELSS. One can diversify the investment by doing SIP. In this case the entire amount which is required to be invested in lum sump way is divided into small amounts each month .It also averages out your risk of investment, that is the entire corpus is invested in different NAV each month resulting to a average rate of investment. In case if one goes for lum sump investment the benefit of averaging is nil.
The return generated after 3 year is tax free in the hands of the investors. If one desires to do investment in PPF he should diversify certain portion of the corpus since PPF will play an important role in her retirement plan too. Regarding doing investments in MIS schemes I will request to moderate it since the MIS helps to streamline income, its interest is not tax-free. Hence, she should moderate the investment in MIS.
But as you all are standing at the eleventh hour of computing your tax liability it is better you break your investment in any 3 different tax saving schemes. Since the risk of putting all the eggs in one basket is also reduced .It is true that now you will not get the benefit of doing SIP. You can plan it for next year starting from April 2009.Now doing investment in ELSS can fetch good returns due to the principal reason of he locking period which works to your advantage as the fund manager can deploy a larger portion of the portfolio in equities, which have the potential to perform better over the long term. He does not need to hold large amounts of cash to service redemptions.
Now doing investment in equities now will be risky as per many of my readers. I will say no since rock-bottom valuations of good quality companies at this moment mean that it is unlikely to fall dramatically. More importantly, there is scope for a big upside from current levels. If you invest in an ELSS now, there is a good chance you are getting in near the bottom, and therefore, stand to reap strong returns over a three to five-year period.
One more important thing which I would like to make remember all of you is this that when you do investment through SIP, the process of redemption follows FIFO (First in First Out).That is if some one does investment in ELSS through SIP in January 2006 he can redeems After January 2009 and all the rest investments follows the same redemption method. If one decides to stay invested even after years of locking period he can do so.
Regarding capital gains I will like to point out few things as we all have made huge losses in 2008. Short-term capital losses from equities and equity-based mutual funds can be set off against other short-term capital gains. This includes short-term capital gains from debt funds, gold and property. Even long-term gains from property and gold can be set off against these losses. "This is a good time to book short-term losses. Just sell your loss-making stocks and buy them again. The stocks and equity mutual funds in which you intend to book losses should have been bought less than a year ago. That's because after a year, the losses (and gains) become long-term capital gains. Since there is no tax on long-term capital gains from equities and equity-oriented mutual funds, there is also no provision to set them off against any other gain.
So plan your tax investment accordingly.