Invest in a tax effective manner

Posted on : Monday, December 30, 2013

After a whole year’s work, sweat, events, parties, travelling, there are some peanuts left unspent. This unspent amount is the real earning and should be savored. In fact to savor it more why not add some cherries to it! The more the cherries the better the savings look

Therefore you need to invest your savings in such a way so that you earn more and also save tax on it! And this is not that easy! One really has to rack his brains in all the investments options available and choose rationally.

We will help you to analyze the three most commonly used investment options; shares, FDs and Mutual Funds in a tax effective manner and help you choose the best out of it.

(A) Fixed Deposits

Fixed deposits involve negligible risk and your savings are secured with the bank. You earn a fixed percentage of interest on it which usually ranges between 8-10%. The interest rate may rise but will defeat inflation! Thus in case of high inflationary conditions interest earned on FD hardly adds anything to your investments. Let us discuss Fixed deposits in two parts.

1. Tax Saving Fixed Deposits
   Tax saving fixed deposits are those which are designed for deduction u/s 80C. They hardly involve any risk. Thus the return is also moderate. Also they require a deposit for minimum 5 years. Tax treatment of Tax Savings FD: Deduction is available upto Rs. 1.00 Lakh u/s 80C for the amount invested in Tax saving FD. The interest earned is taxable.
2. Non Tax Saving Fixed Deposit
   Non tax saving fixed deposits are not eligible for deduction u/s 80 C. They don’t involve any risk and earn a fixed percentage of interest. Tax treatment of Non Tax Savings FD: The amount invested in Non Tax saving FD is not deductible from income. The interest earned is taxable.

(B) Mutual Funds

When you don’t have a handsome amount and want to invest in shares along with other investors you choose the path of Mutual funds. Let us discuss Mutual Funds in two parts.

1. Tax Saving Mutual Funds
   Tax saving Mutual Funds is also called Equity Linked Saving Scheme (ELSS). They involve less risk and the earnings in ELSS are moderate just like those of FDR. Tax treatment of Tax Saving Mutual Funds: Deduction is available upto Rs. 1.00 Lakh u/s 80C for the amount invested in Tax saving Mutual Funds (ELSS). Also the dividend earned from ELSS is tax free.
2. Non Tax Saving Mutual Funds
   Investments in mutual funds other than those discussed above are non tax saving. They involve higher market risk as compared to ELSS. The return depends upon the market condition. If the market is favorable you earn more else you may even lose. Tax treatment of Non Tax Saving Mutual Funds: : The amount invested in Non Tax saving Mutual Fund is not deductible from income. The dividend earned from ELSS is tax free.

(C) Shares

Share trading is a very common investment path undertaken nowadays. But minting money out of the stock market involves deep market study, intensive portfolio management techniques and aggressive strength to bear loss because share markets are very risky. Let us discuss shares in two parts.

1. Tax Saving shares
   If you are new to share trading then you can avail some tax benefits while investing. In other words if you invest in shares through Rajeev Gandhi Equity Scheme (RGES) then you will get benefit of the amount invested in such shares. Earnings depend upon the market. You may lose, you may gain. But since in RGES you will have to hold the shares for 3 years as a mandatory condition, you will not be able to make short term benefits from the market. Your win or lose will depend on the shape the stock market takes after 3 years. Tax treatment of Tax Saving Shares: The amount invested in shares through RGES is tax free. The dividends received from such shares are also tax free.
2. Non Tax Saving shares
   If you invest in shares through any mode other than RGES then it is called investing in Non Tax saving shares. There is no limit to your earnings here. But the risk involved is also high. Tax treatment of Non Tax Saving Shares: The dividend received is exempt from tax. But there is no tax benefit of the amount invested.

The above discussions have been summarized below in a tabular form.

S.No.	Point of comparison	Fixed Deposit	Mutual Fund	Shares
1.	Risk involved	Nil	Moderate	High
2.	Source of Earning	(i) Interest	(i) Dividend (ii) Profit on redemption	(i) Dividend (ii) Profit on sale of shares
3.	Rate of Earning	8%-9%	ELSS- 8%-9% Non ELSS- depends upon stock market	Cannot be determined. Both Dividend & Profit depends upon stock market.
4.	Taxability on amount invested	If invested for 5 yrs through tax savings fixed deposits then deduction up to Rs. 1.00 Lakh is available else no deduction	If invested in ELSS then deduction u/s 80C up to Rs. 1.00 Lakh is available else no deduction	If invested through RGES then deduction up to Rs. 25,000/-is available else no deduction.
5.	Taxability of income earned	Interest- Taxable	Dividend- Exempt	Dividend- Exempt
6.	Taxability on Sale / maturity	Amount received on maturity- Not taxable	Profit on Redemption- if long term then exempt otherwise taxable.	Profit on sale of Shares- if long term then exempt otherwise taxable

Disclaimer: The rates given above may change from time to time. Mytaxcafe is not responsible in case of any disparity.

Mytaxcafe recommends that one should invest in Mutual funds because of the following reasons:

1. The risk is moderate as compared to shares.
2. Return is high as compared to Fixed Deposit.
3. There is a tax benefit of up to Rs. 1.00 Lakh if invested through ELSS.
4. The dividend received is exempt from tax.
5. Long term profit on redemption is also exempt from tax.

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