Month: January 2011

Section 80C Tax Saving Schemes

With the tax season fast approaching, I thought I’d do a post with the tax rates for the current year, and the investing options that can avail you tax deductions. These don’t include things like loss from house property, or disability deductions, but are deductions that can be claimed under Section 80C or 80CCF when you invest a certain amount in some tax saving instruments.

First, let’s take a look at the tax slab for the current year:

Income Tax Slab:

Income Tax Rate
Up to 1,60,000
Up to 1,90,000 (for women)
Up to 2,40,000 (senior citizens older than 65)		 0%
1,60,000 – 5,00,000 10%
5,00,000 – 8,00,000 20%
More than 8,00,000 30%

Education Cess: 3% of income tax & surcharge if the taxable income is more than 160,000.

The cess is levied on the tax itself, so whatever is your final tax liability – take 3% of that and add to your tax to arrive at the tax due.

Tax Saving Schemes

The table that follows lists out tax saving schemes that entitle you to a reduction on your taxable income.

What this means is that if you have a taxable salary of Rs. 9,00,000 and invest Rs. 1,00,000 in any of these tax saving schemes then your taxable salary gets reduced by 1,00,000, and you pay tax as if you only earned Rs. 8,00,000 in the year.

The maximum investment column in this table indicates that the tax benefit ceases to exist for an amount in excess of what’s indicated there. So, if you invest more than 70,000 in PPF – you will still be entitled to tax benefit on only Rs. 70,000.

Also, note that the combination of these options will give you a maximum tax benefit of Rs. 1,00,000, so if you have already bought insurance worth Rs. 1,00,000 investing another Rs. 1,00,000 for ELSS will not get you additional tax saving.

The only exception to this is the 80CCF Infrastructure Bonds, which reduce your taxable income by Rs. 20,000 over and above the Rs. 1,00,000 saved by the other options.

Regular readers know it all too well, but it’s my duty to remind you that I’m not a tax expert, and in fact hire someone else for my own taxes, so you need to keep that in mind while looking at this list, and consider it nothing more than a starting point.

S.No. Name Maximum Investment Notes
1 Life Insurance Premium Paid 1,00,000 Policy should either be in your name, spouse’s name or children’s name
2 Contribution to Public Provident Fund 70,000 You can’t add the employer’s contribution to PF under this head.
3 Investment in NSC (National Savings Certificate) 1,00,000 Post office scheme with guaranteed returns.
4 Contribution to ULIPs 1,00,000 Do your due diligence before getting into these.
5 Contribution to ELSS Mutual Funds 1,00,000 Link to a post on ELSS here.
6 Contribution made to notified pension funds 1,00,000 UTI Pension fund is one example of this
7 Amount spent on children’s education 1,00,000 For tuition fee only, and  a maximum of 2 children
8 Annual Repayment of Housing Loan 1,00,000 There are a lot of conditions in this that I’m not fully familiar with, so you need to consult an expert before banking on this.
9 Tax Saving Fixed Deposits 1,00,000 Term of 5 years (Full post here)
10 Premium Paid Towards Jeevan Suraksha 1,00,000 Pension plan with annuity for life.
11 Section 80CCF Infrastructure Bonds 20,000 This is over and above the 1,00,000 mentioned above. (Full post here)

 

After writing this post I also created a detailed graphic that makes these tax saving schemes easy to understand, and also includes the details on home loan and education repayment which are not present here. You can view the 80C tax saving infographic here.

Update: Premium Paid towards Jeevan Suraksha does not come under Section 80C benefits as listed in this post, but is covered under Section 80CCC.

Thanks to R P Sarathy, and Nilesh Gupta for pointing out the error, and my sincere apologies for my mistake.

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Dividend Declaration, Ex Dividend and Record Dates

Sourabh left a comment with a question about Ex – Dividend, Record Date, and Declaration Dates with respect to dividends, so I thought I’d do a post on it with an example because there are quite a few dates involved, and it can sometimes get overwhelming.

Let’s take an example of Oil India Limited’s Final Dividend to see how this works. The first date is of course the date on which the dividend is announced.

Normally, this is when the Board of Directors recommend a dividend, and it is still subject to shareholder’s approval.

In our example – Oil India’s Dividend was recommended on May 26 2010, when their directors said that the company will pay a dividend of Rs. 16 per share, if it’s approved by the shareholders in their AGM (Annual General Meeting).

The AGM was held on 25th September and the dividend was approved by the shareholders.

But, the question is who gets the dividend?

Since shares are traded throughout the year, and dividends declared just a few times in a year – it becomes necessary to fix a date, and say that whoever owns the shares on this particular date will be entitled to the dividend.

This is called the “Record Date”, and in our example this is 25th September 2010, so whoever has their name in the company’s books on 25th September 2010 will get the 16 rupee dividend.

However, there is another more important date, which is called the “Ex-Date”. There is a time gap between when you buy a share, and when your name gets on to the company records, so if you buy Oil India shares on 25th September – your name will not be in the books of the company on 25th itself, and you won’t get the dividend.

You need to buy the share before the Ex Date because that ensures that there is enough time for your name to get into the company’s registers, and get you the dividend.

In this case the Ex – Date was 16 September 2010. This was much earlier than the 25th September 2010 Record Date because the company closed its books from 18th September to 25th September, and in other cases (especially of interim dividend) the Ex Date can be just one or two days earlier than the Record Date.

So, if you want to buy a share for its dividend, then make sure you purchase it before the Ex Date.

Dividend Record Date and Ex Dividend Date
Dividend Record Date and Ex Dividend Date

Do keep in mind however, that the share will lose in value on the Ex – Date because the person who buys the share on that date will not get the dividend.

How can you find out the Ex Date?

The easiest way to find the Ex Date is to lookup the info from the NSE Website. You can input the ticker on the search box on the home page, and when the price details open up on the next page, scroll to the bottom of the page and click on “Corporate Actions”, and this will open up a table that shows you Ex Date for each announcement among other things.

I don’t think it makes much sense to buy a share a few days before the Ex Date in order to get the dividend because the share will lose in value as soon as you hit the Ex Date, so I’d say knowing this concept is good for your knowledge, but don’t try to buy stocks too close to the Ex Date because the market is efficient enough to reduce the price of the share with the value of the dividend when the Ex Date is reached.

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IFCI Infrastructure bond last date extended till 12th January 2011

Arun left a comment on the Infrastructure Bonds Calendar post about the extension of the last date of the IFCI Infrastructure bond, and since a lot of people were asking about this I thought I’d do a mini – post to inform everyone that the last date for these bonds has been extended to 12th January 2011.

So, this is useful information for everyone who is looking to invest in infrastructure bonds, and is fighting deadlines to submit the proof.

Thank you Arun.

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How to apply filters in Gmail automatically?

You can use a combination of Gmail Labels and Filters to automatically label incoming messages, and make them stand out from the rest of the conversations.

So, if you get a large number of funny forwards from your friends, and are afraid that your wife’s email will get lost in all the clutter, then create a rule that labels all your wife’s email in a certain color, and brings it to your attention.

Here is how you go about it.

1. Go to “Settings” at the top right hand screen of your Gmail screen.

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2. On the next page – click on “Filters”

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3. This will open up a page which shows your existing Filters as well, as a hyperlink to “Create a new filter”.

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4. Click on the hyperlink, and you’re presented with a screen that lists down the various filter options.

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5. For this example, let’s say I put my wife’s email address in the “From” box, but you could put in any criteria that meets your goal. You can then click on either Test Search or Next Step, which will show you the following screen.

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6. You can select “Apply the label” checkbox, and then choose “New label” from the dropdown, or any other action that you’d like to do with these type of messages, and click on “Create Filter”. There’s also an option to apply the filter to existing conversations, and you can see if you want to do that or not.

That’s all you have to do to create a filter that marks all incoming message with a certain label based on a pre-defined criteria.

You can then go in to the label, and select a color for the label because that really helps to make the message stand out from the rest, and catches your attention quite easily. You do that by clicking on the little box on the left of the name of the label and selecting a color from the options that open up.

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I hear a lot of good things about Priority Inbox, but somehow that doesn’t work for me at all. I guess it’s useful for people who get hundreds of emails a day, and I’m not one of those. But still, this labeling – especially the use of color is good for anyone who wants to highlight a certain type of message in their inbox, regardless of how many emails they get.

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Tax Saving ELSS Mutual Funds

This is yet another post from the Suggest a Topic page, and in this post I’m going to take a look at the ELSS (Equity Linked Saving Schemes) mutual funds or tax saving mutual funds in a  little bit of detail.

Let me start off by telling you that there are plans to phase out the tax breaks on ELSS mutual funds with the introduction of the Direct Tax Code (DTC), so this avenue is going to be closed in the coming years.

However, you can still invest in it this year and get tax breaks. These tax saving mutual funds are covered under Section 80C, which means that you can invest a maximum of Rs. 1 lakh in them, and reduce that amount from your taxable income.

There is a lock-in period of 3 years on such funds, which means that you can’t sell these funds within 3 years of your purchase date.

I saw an interesting question on Value Research some time ago where someone had written in to ask what happens when they select the dividend re-investment option in the case of a ELSS fund.

The dividend that is invested back in the scheme is considered fresh investment, so what happens is that this money is further locked in for three years, and this can create an infinite loop. I’m not sure what will happen going forward with DTC coming in, but it’s best to play it safe, and go for the Dividend or Growth option of the ELSS you’re buying.

Before we get down to the options available under ELSS funds, let’s recap the points discussed so far:

  1. The tax benefit of ELSS will be phased out with the introduction of DTC.
  2. The tax benefit is still available this year.
  3. There is a lock in of 3 years, so you can’t sell these tax saving mutual funds within 3 years of purchase.
  4. If you use the dividend re-investment option then the amount re-invested will be treated as fresh investment, and will be locked in for 3 years from the time of re-investment.

ELSS Mutual Fund Options

I wrote a post on how to find tax saving mutual funds some time ago, and I used that information to get a list of all the ELSS mutual funds currently available in India, and then narrow down options from there.

Then I looked at the funds that were around for 5 or more years, and took the 10 best performing out of them.

After that I noted their expense ratio, as well as their inception date in the table below. Doing this gave me a list that has some tax saving funds that have been around for a very long period, and have done reasonably well over that period. The expenses are important because they eat up your returns, so I wanted to highlight them as well.

The limitation with this list is that it doesn’t contain any mutual funds that have been around for less than 5 years even if they performed well. For example – DSP Blackrock is a ELSS mutual fund that has been around for about 4 years, has done well during that time, but is missing from this list.

Name Inception Date 5 year returns Expense Ratio
Birla Sun Life Tax Relief – 96 March 1996 16.57% 1.96
Canara Robeco Can Equity Tax Saver March 1993 22.31% 2.38
HDFC Tax Saver March 1996 17.80% 1.86
ICICI Prudential Tax Plan August 1999 15.48% 1.98
SBI Magnum Tax Gain Scheme – 93 March 1993 16.32% 1.78
Principal Personal Tax Saver March 1996 16.42% 2.19
Franklin India Tax Shield April 1999 17.34% 2.10
Sundaram Tax Saver Nov 1999 17.73% 1.96
Sahara Tax Gain March 1997 22.31% 2.50
Reliance Tax Saver August 2005 15.14% 1.88

All data from Value Research

This list is not sorted in any particular order, and that’s deliberate because as soon as you sort something your brain tends to think of it as best to worst from top to bottom, but that’s not the case.

For mutual funds – the best mutual fund is the one that will give you the maximum return for your holding period, but since that’s in the future, there is no way to really predict which one will do better than the rest.

In the absence of that I compiled a list of long standing performers, and have presented you with that information, and if you think this criteria makes sense, then you can select one or two funds from this list for your investment.  

I will also recommend going to Value Research and doing some more research, and playing with their tools because they do have a lot of good tools in there.

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Wish you a very happy new year!

A very happy  new year to everyone, and I hope 2011 brings you great wealth, happiness and prosperity. I thought I’d pen a few thoughts to start off this new year that touch upon thrift, investing, and behavior.

1. No credit card debt: This is one thing that I’ve said a few times earlier, and want to emphasize again – credit card debt is the worst kind of debt for anyone, and can spiral out of control very easily, so as far as possible bring your credit card balance to zero at the end of every month. If you must keep a credit card balance, then make it a high priority to get that to zero as soon as practically possible.

2. Brace yourself for stock market volatility: The stock markets are inherently volatile, and are prone to crashes, and violent downturns that can cause panic fairly quickly. If you’re disciplined in your buying, and have stuck to blue chips then you will be able to handle this volatility a lot better than if you’ve bought penny stocks that can lose a lot of value fairly quickly. If only a part of your portfolio is tied with stocks then you will sleep a lot better at night during these times. I don’t know if we will see a crash in 2011 or not, but I won’t be surprised if there is one because of the way the market has zipped up after the recession. So, I’d say you should prepare yourself mentally for volatility.

3. Ask a question, and avoid unforced errors: I’ve seen at least a couple of comments in the past few days that suggest that the person asking has bought an infrastructure mutual fund mistaking it for the tax saving infrastructure bonds, and is in a bit of a pickle now. If you’re not sure about anything then ask a pointed question before making a decision. I was guilty of not asking many questions till not too long ago, but have improved over the years. It’s amazing how many unforced errors you can eliminate by asking questions, and avoiding assumptions.

4. Don’t miss the forest for the trees: When you have spent time pursuing something, and things don’t go your way – it’s only natural to get upset and disappointed, but don’t sweat the small stuff too much. If you created a fixed deposit with 1 lakh at 7.5%, and then the interest rate goes up to 8.5% then I can understand that you will be a little disappointed, but don’t lose sight of the fact that the extra percent in your case just amounts to Rs. 1,000 a year (and I’m not even deducting taxes here).  Rather than fretting too much about this – think forward, and get on to the next thing. Try to move on to the next thing as quickly as possible, and don’t miss the big picture because of some hiccups.

5. Additional sources of income: Roger Nusbaum offers a unique angle to planning for retirement income, and that is to find a hobby that pays you. That way you can add an extra source of income, and earn money enjoying what you do. One of my Maths tutors was a retired school teacher who used to love to teach, and sometimes he used to phone me up, and call me to his place just because he was getting bored. The work kept him fit and mentally alert, and he used to earn well also.

I like this common sense approach of looking for a hobby that pays you, and though I realize not everyone will be able to think of something immediately – I’m sure if you’re actively seeking out something you will eventually think of something.

I want to wish all of you once again, and hope that this year brings you peace and happiness.

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