Dear Friends,
Let me introduce myself first, my name is Naveen K R.I am a Qualified Chartered Accountant (CA) and Company Secretary (CS). Thought of writing a small article on “Tax Planning” which would help all the members to plan there Tax in legal and legitimate manner
Tax Planning means using the benefits as given in the statute/law/act like Deductions, Exemptions and cutting down the out flow of money by way of tax in legal, ethical and legitimate manner. In short, it is making use of beneficial piece of law to save the money by means of tax, by utilizing such provisions. It means bending law but without breaking it, which is universally accepted and permitted.
The common mistakes/errors committed in case of Tax Planning are as follows:-
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Planning at the year end (Due to lack of time, proper decision are not taken)
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Lack of understanding of the Provisions stated in the Act/Statute
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Poor knowledge of the channel (Product or Instrument) chosen for your investment
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Relying on the advices given by the friends, neighbors, colleagues and others without analyzing whether that will suit to your needs and risk taking abilities
Most of us are successful in saving of hard earned money but when it comes to investments every one expects it to be invested in the best possible manner. So we shall discuss in this article where investments are made, which are best suitable for and each and every one by understanding the risk and returns involved as well as to “Save Tax”
There are various modes of investments like Public Provident Fund (PPF), Tax Saver Fixed Deposit, Tax Saver Mutual Funds, Investing in Life, Term & Medical Insurance policy so on and so forth. Lets us deal all the option in a systematic manner
In this article, will explain one of the popular most common and effective mode of investment in Public Provident Fund (PPF)
Salient features of PPF:-
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PPF is administered by Government of India
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PPF account can be to compared to Bank account, any resident individual can open an PPF account either in Post Office or in Recognized Nationalized Banks like State Bank of India
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PPF account can be opened in own name or on behalf of his children (if they are minors) or on behalf of your parents
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The minimum amount of investment is Rs.500
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The maximum amount of investment is restricted to Rs.1,00,000 per financial year
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The rate of interested is 8.8% per annum
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Interested would be calculated yearly basis or Annual Compounding
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The amount of deposit made in the PPF account during a Financial Year would be deducted from you Total Income earned for computation of Tax. That means on the savings made in PPF you need not pay any tax. Here Financial Year means beginning of April to Ending of March i.e. 1st April to 31st March. This benefit derived under Section 80C of Indian Income Tax Act,1961
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The amount deposited in PPF account would be locked in for a minimum period of 15 Years
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The Interest on PPF amount is also not taxable
In short both principal amount of investment in PPF as well as interest earned on are not taxable
Planning with PPF
· Liquidity Crisis: We have already noted that PPF comes with a lock in period of 15 years. Having said this, Banks offer loans against PPF investments from 3rdyear onwards (25% of the balance in the PPF A/c can be availed as loan). Partial withdrawal from PPF A/c is also permitted after the expiry of 5 years.
· Risk in Investment: Literally the PPF investment suffers a 0% Risk, as it is administered by Government of India. This type of investment are also know as “Gilt” where the risk involved is almost to zero or nil
· Suitability: It is best suitable for those who would like to invest on a long term basis. It would be one of the best means retirement planning
· Maximize Interest Earnings: Interest is calculated on the lowest balance between 5th and last day of the month. So to enjoy more interest, try depositing the amount in PPF account between 1st to 5th of the month
Disadvantages :
· It is not suitable for short term as lock in period involved is 15 years
· Rate of interest which is currently at 8.8 per annum, would be keep varying or changing with respect each financial year
· It is not suitable for investor who are aggressive and accepts risks
Before concluding this article, would like to place quote, “Higher the Risk Higher the Return” and vice versa. Thus PPF falls in the risk free investment mode where you get safe returns in addition to tax benefits.
Your views, comments and suggestion are appreciated.
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