Tax Planning Archives - Page 7 of 9 - CAGRfunds

July 31, 2018July 31, 2018

Everything about tax saving mutual funds

Tax Saving Mutual Funds or ELSS (Equity Linked Savings Scheme) funds are a type of mutual funds which give you tax benefits under section 80C and also enable growth in your investment. Like all other equity mutual funds, they too invest in the equity market. So what makes them unique and desirable?

Potential of generating high returns (historically, the good funds have generated an average annual return of more than 15% )
Least lock-in period of 3 years compared to other tax-saving options
Deduction of ₹1.5 Lacs every year from taxable income, thus a saving of up to INR 45000 in tax
More equity exposure (linked with higher returns) than any other tax saving options
Available to HUFs also (Unlike individuals, HUFs have limited alternatives to save tax)

So, basically an individual or HUF (Hindu Undivided Family) can avail an exemption of ₹1.5 Lacs from their total taxable income in every financial year by investing in ELSS Mutual Funds under Sec 80C of Income Tax Act, 1961. In addition to this, a capital gain of ₹1 Lac is tax-free. Gains above ₹1 Lac are taxable @10% under Growth plans. Dividend plans will have a 10% tax levied from April, 2018.

How is ELSS better than other investment options (ULIP, FD, NPS, PPF, and NSC)?

ELSS will therefore be appealing to an investor who has a higher risk appetite as ELSS funds have the potential to outperform and generate better returns than FDs, NSCs, and PPF/EPF.

Final Thoughts:

There’s a widespread misconception that equity is too risky for older investors or for retirees and therefore they should not use ELSS. The truth being that every investor, who has a high risk appetite and wishes to invest in equity, has ELSS as a great investment option. It benefits your finances by saving on tax and generating better returns than traditional investment options.

The main issue that we, as Indians, face is inflation (6-7%). Fixed deposits and similar investments take a big hit because of inflation and the falling rupee rate. The returns are simply not rewarding and barely help to keep the value of the principal investment. For an investor saving for his children’s education, FD may not suffice as education inflation grows by 15% while for a retired person, prices for goods and services from healthcare grow by 20% due to inflation. Such long term investments maybe very underwhelming.

Of course, like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. Equity investment is a higher risk instrument over the short term. However over a span over 3 to 5 years, the market fluctuations are averaged out and the returns are usually healthy.

Investors can choose to invest lump sum too. Although, it is riskier than SIP as your returns can vary with the market highs and low. During a market high, it seems attractive to invest and during lows investors rush to stop investments. This is where they make lose on an opportunity. High markets fetch lower units and hence lower returns. Low markets fetch higher units and hence higher returns. Although, timing the market is never certain and it’s advisable to invest through SIPs as market highs and lows will produce a healthy average return in the long run.

February 1, 2018February 2, 2018

Budget 2018: What should investors be doing?

The much awaited Union Budget 2018 was presented and views as usual are multi-fold and diverse. Here is a short summary of the key questions that must be on your mind as an investor. Please feel free to post any further questions as comments or reach out to us on contact@cagrfunds.com. You can also Whatsapp us your queries on +91 9769356440.

Which are the sectors which are under Government focus?

The focus of the NDA Government is on strengthening the ground level infrastructure and thus the focus has truly been on the lower pyramid of the society. Most of the budgetary support has been rolled out to sectors which therefore impact the rural economy. Key sectors that are under focus are:

Agriculture & Rural – Focus on agriculture was an expected move this year.

MSPs to be 1.5 times the cost of input to the farmer. This should benefit all agri input companies (Seeds, Fertilizers, Pesticides)
Focus on improving access to maximum MSPs – Historically, farmers have not received the MSPs that they have deserved. While the Government claims to be committed to improving access, we need to wait and watch the success of the same.
Promotion of Organic farming – Will be useful for seed companies, not so good for fertilizers and pesticide companies. But given the small scale of organic farming in India, the impact is not expected to be material
Cold Storage – They are likely to be positively impacted if Operation Green is implemented well. A good part of potato production in India gets wasted and hence this is a welcome move
Overall, several initiatives have been rolled out for improving the rural livelihood. Actual benefits will depend on implementation

Health – Several initiatives have been rolled out for the Heathcare sectorHealthcare sector.

Flagship National Health Programme to cover 50cr people. Poor families to have better health insurance coverage
Focus on medical research
Use of generic drugs likely to increase

Should you then start investing in the thematic funds related to the above sectors?

Every year the budget rolls out some enhanced and some new policies for the key sectors. Short term sops lead to short term gains while structural reforms have a very long term play. From a broader picture perspective, sectors which are over exposed and dependant on Government policies should be avoided as any change in the Government itself or their priorities can have a very significant impact on particular sectors.

We therefore suggest that taking concentrated exposures in particular sectors should be avoided. In mutual funds, diversified exposures are always safer.

What is the tax implication on Equity?

What is grandfathering of returns?

If your investment in Mutual Funds and Equity is there for more than 1 year there would be a tax of 10% on the profit earned which was 0% as of now. For this they have considered Base Year as 31/01/2018 and profit calculation will be based on the higher of the two values – actual purchase price and the price on 31st January 2018.

For Example, consider that you have invested INR 100 on 1st September 2016 and you redeemed on 2nd April 2018.

Price on 2^nd April 2018: INR 180

Price on 31^st January 2018: INR 150

Long Term Capital Gains: INR 180 – 150 (since this is higher than the actual purchase price of INR 100) = INR 30

Tax to be paid: 10% of INR 30.

Short Term Capital Gain remain unchanged at 15%.

With long term capital gains tax on equity being levied, are equity mutual funds still an attractive investment avenue?

Equity as an asset class is still attractive when we compare the returns with other asset classes. The benefit of compounding your money at a higher rate is immense when you are planning for your long term financial goal. Further, this taxation does take away some of your gains in the form of taxes, but even after the tax implication the post-tax returns are far more lucrative than other asset classes.

What does it mean for the debt mutual funds?

Debt funds still remain an attractive investment vehicle for people in the 20-30% tax bracket. In the present budget there has been no change in the tax structure for debt mutual funds so it remains an attractive investment avenue to gain from the benefit of indexation in the long run. Read more about how and when are Debt funds useful here.

What does it mean for you if you are a senior citizen?

The budget gives a big relief to senior citizen. Any interest a senior citizen earns either from fixed deposit or savings bank account is exempt to an extent of Rs. 50000.

So if you are a senior citizen and want to park an amount up to Rs. 700,000 for 1-5 years, then a fixed deposit now makes better financial sense for you.

What does it mean for you as a retail equity investor?

If you want to invest for the purpose of wealth creation with a time horizon of more than 5 years

For retail investors on a relative basis equity mutual funds still remain an attractive asset class. On a risk adjusted basis it will still outscore other asset classes. As a retail investor you will gain financial independence by saving more and maintaining your asset allocation as per your risk appetite. Also, it is recommended that choose “Growth” schemes as dividends are now taxable at 10%.

If you want to invest for 3 – 5 years (but more than 1 year) to generate better returns

For people who were using dividend option for such measures will have to re-look as dividends now will be taxed at 10%. However, a hybrid product such as a balanced fund may still outperform other possible asset classes for this objective. Therefore it is suggested that you take exposure in “Growth” options of balanced equity funds through the SIP or STP route. Lump sum (one time) investments in equity or equity mutual funds for such time frame should be avoided.

If you want to park your money for use between 1 – 3 years

Ultra – Short Term and Short Term debt funds where there is no change in taxation still remain an attractive investment avenue.

If you want to park your money for use within 1 year

Arbitrage funds as a category will become relatively less attractive as you will have to pay 10% taxes on dividends received. However, if you are in the 30% tax bracket, this is still a more lucrative option than other alternatives available (since Ultra Short term debt funds are also giving lower than average returns). On the debt side there is no change

If your existing holdings are in below types of funds, then what actions should you be taking?

Arbitrage funds – Stay invested till March 2018 since all changes take effect from April 2018.

If you are in 20 -30% tax bracket and withdrawal is planned within 1 year: Continue to stay invested in Arbitrage Funds even after March 2018
If you are in 20 – 30% tax bracket and withdrawal is planned after 1 year: Split exposure between Arbitrage Funds and Short Term Debt Funds
If you are in 10% tax bracket: Shift to Ultra Short Term and Short Term Debt Funds

Ultra Short Term Debt / Liquid Funds – Continue to stay invested. If funds are not required to be deployed in next 3 years, you can consider taking small exposures in equity on market corrections (if they happen over the next few weeks)

Dynamic Bond Funds – We are not recommending dynamic bond funds in the present scenario seeing the volatile debt markets to retail investors.

Short Term Funds – Short Term funds have had small hits because of the debt market volatility.

Investors should not look into the category for less than 1 year. For less than 1 year stick to ultra-short term funds
Some of you would have seen less returns in the short term funds in the last 3 months because of a sudden spike. We would like to emphasize that during our discussion with you we had suggested these funds for a horizon of more than 1 year. So please hold on the investments as the returns are likely to improve in the next 3-6 months

Duration Funds – We still hold our previous view of sticking to short term bond funds and accrual funds seeing the interest rate scenario.

Equity funds – As long as your time horizon is more than 5 years, stay invested. However, periodic look at the portfolio for re-allocation and re-balancing is inevitable. At CAGRfunds, we are committed to your wealth creation. While we are planning to start are annual re-allocation and re-balancing exercise after 15^th February, 2018, do reach out to us if you want to discuss your portfolio prior to that.

Overall take: We feel that as retail investors we will benefit far more by focusing on the basics (which is our hand) which is consistent increase in our savings. Ensuring regular investments over a long period of time will help us reap the true benefit of compounding and create wealth over the long run. We therefore highly encourage starting / moving to the SIP mode of investment. While short term trading / speculation in direct stocks was never recommended for retail investors, it becomes all the more unattractive now. Also, the objective of investment at the first place is not to save tax. It is to build wealth. Equity mutual funds and a diversified portfolio continue to keep the objective intact and hence no major changes are required in the face of tax implication.

The only way to secure your future is to build it!

Disclaimer : This update is as per the information available as on 1st February 2018 from the budget document

August 9, 2017

My 15 lakhs FD matured. How do I use the money?

As per a recent survey by SEBI, more than 95% of Indians prefer parking their money in Fixed Deposits (FD). Well, if that is true by any measure, then it is only likely that a good number of those FD(s) are maturing every single day. And the looming question is – Should I start another FD?

Before we answer this question, let us look at the various options we have in hand.

Retain it as cash – Unless you have a spending need within the next 7 days, there is ABSOLUTELY no reason to consider this. Liquid funds work best for any spending needs in near future. Idle cash at home is like a bucket of still water. The level only depletes with time gradually.

Start another fixed deposit – Fixed deposit returns have been falling and the extent of our expenses is increasing. Healthcare costs increase by approximately 15% every year. Are the fixed deposit returns still attractive? We would say a big NO to that. Low returns coupled with taxation of returns renders them to be an unattractive investment destination. With easy access to better information, a lot of Indians are now realizing this. Have you awaken yet?

Invest in debt funds – Debt funds are a type of mutual fund which invest in debt related instruments like Government bonds, corporate bonds, commercial paper (CP) etc. The reason a lot of people are now shifting to debt funds is because of better returns and lower taxation possibilities. With the tax net getting stringent, it only makes sense to explore all possible avenues of reducing tax liability. Read more about how debt funds fare better over FDs here

Invest monthly in equity funds – Equity mutual funds are the latest talk of the town. Useful or in-vogue, whatever you call them, they are amongst the very few wealth creating asset classes available to Indians today. A pre decided monthly investment in equity mutual funds can result in double digit returns over the long term. But only and mostly over the long term. And by long term we mean that your money should stay invested for more than 5 years. For example, an investment of INR 80,000 over 18 months (INR 14.4 lakhs) can lead to a corpus size of INR 41 lakhs after 10 years (Assuming annual return of 12%). And that too tax free.

Therefore in conclusion, the best investible options available are debt and equity mutual funds. You can choose either of them or a mix of them depending on your risk profile, return expectations and time horizon.

How do we help?

At CAGRfunds, we assess your complete profile in terms of risk, return and time horizon and accordingly make customized suggestions to you. We ensure that your money gets invested in the right avenues and meets your expectations.

July 31, 2017September 3, 2018

Is your fixed deposit making you wealthier?

Last week, I met a lawyer on my flight to Delhi. Since I had nothing better to do, I broke the ice and soon, we started discussing about my favorite topic – how do we get wealthier over the long run.

So I asked my new found lawyer friend, what does he do with his surplus funds? Immediate response – “Fixed Deposits!” So I then asked him why? And with a very perplexing look, he said – “My money grows at 6.5%. Do I need another reason?”

That is when I realized the lack of awareness that is prevalent even amongst the learned breeds of lawyers. I therefore introduced him to the concept of Debt Funds.

Debt Funds are those mutual funds which invest in debt instruments like bonds, debentures and money market instruments. But why are we comparing debt funds to fixed deposits?

Fact 1: Debt funds on an average give an annual return of 7.0% – 8.5%. SBI 1 Year Fixed Deposit yields 6.9% interest annually, and a 3 Year Fixed Deposit yields 6.50% annually.

Fact 2: If money stays invested in a debt fund for more than 3 years, then you end up paying considerably lower tax on the returns from such debt funds. This is because of the indexation benefit. Indexation implies to inflating purchase cost to account for inflation. As a result, returns which are subject to taxation is reduced. Also, such reduced returns are taxed @20%. However, in case investments are held for less than 3 years, the gains are added to the income of the investor and taxed as per the income tax slab rate applicable.

Fixed deposits are taxable as per the applicable slab rate of the investor, irrespective of the holding period of investment. That doesn’t sound good at all!

Let us understand by examples:

Consider an investor with income of INR 15lacs. He is willing to invest INR 1lac. The tax slab for this investor is 30% as per the income tax slab.

Case 1: Comparison of FD vs Debt Fund, assuming different rate of returns (as per Fact 1 above)

The net gain from investing in Debt funds exceeds in both the holding periods, so the investor is better off by investing in debt funds after taxes.

Due to indexation benefit, the purchase price has been inflated from ₹100,000 to ₹119,808, thereby reducing the tax liability from ₹6,238 in FD to ₹539 in debt funds. This benefit is available when the holding period is 3 years or more.

Case 2: Let us consider a scenario where returns from debt fund are the same as that of FD

An investor is better off by ₹6,051 even if the returns are same, in case holding period exceeds 3 years. Hence, debt funds are more tax efficient than fixed deposits in every scenario.

Time you think about the funds lying in your bank account?