Saving Taxes - Part 2

For those who chose 'Option 1' (and the majority of my friends fall in this category), here's why you should not 'actively' pursue this route.

- As long as you are employed, the employer will ensure that a certain amount of your salary is allocated to your Provident Fund (PF) contribution. Typically, this is 12% of your 'basic pay' which  is deducted from your salary and paid to your PF Account. One can increase his / her contribution upto 100% of 'basic pay' and is tagged as VPF (Voluntary Provident Fund). 

My personal view - maximize your contribution to your PF account; it is portable (with the new unique account number you need not worry about transferring PF accounts whenever you move jobs), allows for withdrawal, has a 'good' rate of return.

- Public Provident Fund (PPF): Many of my friends build a 'fund' for their children's education by investing in PPF. As per FY 2015, the limit is Rs. 1.5 lakh per year. PPF has a lock-in of 15 years and this perhaps is its greatest disadvantage.
My personal view - instead of PPF, invest in VPF.

With the above two categories, people tend to max out the 1.5 lakh limit available under which you 'save taxes' under Sec 80 C of the Income Tax Act. The other categories are as below:

- Premium paid towards Life Insurance / Pension policies: All of us have some form of life insurance / pension product. Whether the 'Life Cover' is commensurate with the insurance needs of the people who have bought these products is a separate discussion!. They also fall under the overall limit of Section 80 C.
My personal view - buy a high life cover with a term insurance, then an endowment / money back policy and finally, a ULIP.

- Premium paid towards Medical Insurance: This avenue encourages people to support the expenses around medical emergencies. Premium paid is deductible (subject to limits - Rs. 15,000/- per year for non senior citizens; Rs. 20,000/- for senior citizens) under Section 80D.
My personal view - buy medical insurance as early as possible, for self, and parents even if the employer provides you a group medical insurance cover.

A smaller segment 'saves taxes' by donating to charitable organizations under Section 80G. The deduction varies from 25% to 100% depending on the charity you have donated to.
My personal view - if you want to donate, then forget about getting the extra leverage of the 'tax benefit'. 

There many more options like 'interest paid on education loan', 'principal repayment for a housing loan', etc. but in all these cases potential to save tax is incidental. One does not take an education loan to study because there's an tax benefit on the interest paid!!

Let me remind you that "Investing to Save Tax is Not Investing'.

Next part is for the minority who chose Option 2.

Saving Taxes - Part 1

Am back to my blog after a long long lazy break and here's my view on 'Saving Taxes' in the Indian context.

'Death and Taxes are the most certain things in life'; the quote (though slightly modified holds true in everyone's life.

As Indians, we are groomed to save. Right from childhood, parenting has inculcated the habit of saving for a 'rainy day'. Piggy banks of our childhood give way to complex jargon of the Income Tax Act during our earning years.

As many of my friends, I too 'saved' in 'safe' (from risks) instruments. Somewhere over  the years, my efforts went from the primary focus of 'saving for the future' to 'saving from taxes'.

Over  the years where I have learnt the nuances of personal finance from personal experience (and the experience of friends and family), I would like to highlight 2 key points.

Firstly, 'saving from tax' is not investing. Secondly, saving in 'safe' instruments is a dream.

Let me elaborate on each point.
In our country, where the taxman treats every citizen as a 'dishonest' tax payer, you are guilty of tax evasion till proven innocent. Tax evasion is not defined by the quantum of tax one has evaded. As the law of the land prescribes, tax needs to be paid on most 'sources of income' and 'forms of wealth'.

Another case in point is that our constant focus is to save in instruments which as per the stipulations of the Income Tax Act help us save some tax.

Let's take an example:
Option 1: One spends Rs. 100/- in a tax saving instrument (say Insurance Policy) and gets Rs. 30/- (highest tax bracket) reduced in his tax liability.

Option 2: Alternatively, you pay 30% on your Rs. 100/- as tax and invest the remaining Rs. 70/- 

Given a choice which option will you choose.

When To Buy and When Not To Sell - Part 1

Many of my friends and colleagues ask me for the next hot tip about a stock. One of my friends even asked me if there was a stock which will help him double his investment of Rs. 10,000/- in 6 months. This was a question he asked me in 2013, way before the Indian stock markets saw a fantastic rally.

My response to him was that he was better off trying his hand at gambling than stock markets.

Many of my acquaintances enter the stock markets for 'quick returns' with 'one time investments' which will not hurt them if they lose the entire amount. A quite a few enter 'penny stocks' as they can buy more for the same corpus instead of buying a stock of a blue-chip company trading at Rs. 2,000/- a share.

Here are the few 'life experiences' of people who have 'gambled away' their money on the stock markets.
- "Buy many a penny".
If I buy 1,00,000 stocks each worth Re. 1, and if the stock increases by another Re. 1 (for a stock to move by Re. 1 is very easy afterall), then I can safely exit my investment.

- "I have not lost till I have exited at a loss"
My stock selection or the stock markets have caused my stock portfolio to fall by 75% in value. I will will not sell as what is left does not hurt me for holding the stock for another 10 years for it to come back to my cost price

- "I bought because I was told to buy"
My friend / broker / relative told me to buy a given stock and its the new 'hot pick' on Dalal Street and everyone of Business Channels have great expectations about the company.

- "I have not sold because I was not told when to sell"
I was making Rs. 1,000/- profit on the stock in a single week but I wanted to go up further. Now its 50% of my cost.

- "You handle my portfolio but give me assured returns"
I have invested in a Portfolio Management Scheme (PMS) of a large broking house and the 'capital is protected' and it will be give me returns in line with the benchmark (e.g. Nifty).

Does any of these stories sound familiar? More in my next part.