Why plan taxes before investing

Posted by Mehul Kothari | Published on 06 Feb 2019
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Why plan taxes before investing

We read in the previous section that tax planning can help you save a lot of money. But tax planning can be truly efficient if it’s undertaken before investing and not after—a mistake that many make. Only then can you enhance your ‘real return’ and ‘post-tax yield’—your returns after being adjusted for inflation and tax.

Of course, while taxes shouldn’t drive your investment decisions, it is important that you consider it before investing. Let’s understand why:

1) Tax planning helps you understand tax exemptions, deductions
Investments have different tax angles. Notable are tax exemptions and deductions. And before you take an investment decision, it’s important that you know about these. This can help you make a better, more tax-efficient decision.

Tax Exemptions

As you may know, not all income is taxed. The same applies to investments too. For example, the interest payments from Fixed Deposits are taxable as per your Income Tax slab rate. But dividends from Mutual Funds or Insurance payouts are exempt from tax—they attract zero tax. And while you may report them in your Income Tax filing, they don’t get added to your taxable income. Every investment option has its own tax rules. If you get your tax planning done in advance, you will know what investments fit you the best from a tax point of view. This can mean the difference between high tax liabilities and tax savings.

Tax Deductions

Many confuse exemptions with deductions. In truth, they can’t be any different. Exemptions, as we read earlier, are when the income is not taxed at all. Deductions, in contrast, is an expense that lowers your taxable income, thus reducing tax liability. Now deductions can be expenses of all kinds—towards assets, investments, etc. The most notable tax deductions in India are the investments under Section 80 of the Income Tax Act. If planned wisely, these can be used for maximum benefit.

i. U/S 80C: Investments like Tax-saving Mutual Funds (ELSS), 5-year Bank/Post Office Fixed Deposits, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), etc. can help you get a tax deduction of up to Rs 1.5 lakh every year. Your expenses towards Life Insurance and Home loan repayment too can get you a tax deduction of Rs 1.5 lakh under this section.

ii. U/S 80D: All premium paid towards medical insurance can get you an additional tax deduction of up to Rs 60,000 in a year. This amount, however, includes the premium paid for policies that cover you, your spouse, dependent children and parents.

iii. NPS: Contribution to the National Pension Scheme or NPS can get you an extra tax deduction of Rs 50,000 over and above the Section 80C limit.

iv. Home Loan: Under Section 80C, you availed a tax deduction on the ‘principle repayment’ of your home loan. You can get an additional tax deduction of up to Rs 2 lakh on the ‘interest repayment’ of your home loan as per Section 24 of the Income Tax Act. First time buyers can get an extra deduction of Rs 50,000.

2) Even when taxed, some investments are more tax efficient than others

Investments can be taxed or get you exemptions/deductions at three levels – the initial investment, regular interest or dividends generated throughout the tenure of the investment and the final stage—when you sell the investment to pocket profits. So, when you consider an investment, look at all three tax points. Some investments, for example, have an EEE tax policy. This is when it is tax-free at all three stages. Stock market investments are an example of such investments (if you hold it after 1 year). It does not get you an initial tax deduction, yet, when taxed, it turns out to be more tax efficient.

3) The tax-efficiency of an investment depends on the tax bracket you fall in

It’s not just about how the investment will be taxed. What also matters is the tax bracket you fall in. Imagine if there are two investment options that give you equal returns. But one is taxed as per your Income Tax slab rate. The other has a fixed tax rate of 20%. In such a case, two people can make opposite decisions. Someone in the 10% tax slab would choose the first option. After all, the slab rate is lower than the 20% tax rate. But a high-networth investor (HNI) may opt for the second option. After all, for the HNI, the 20% tax rate will be welcome. This is why the post-tax yield varies for investors considerably even though the amounts invested, tenure and the products might be the same! Other important points to note about Investments and Taxes:
- You may need secondary sources of income. Investments can be one of the sources. In such cases, it’s important to know your tax liability first. Income from your investments are not always taxed equally. For example, if you invest in a bond directly, then you may be taxed for the interest payments. But if you do so via a Debt Fund, the income you receive through dividends are not taxed in the hands of the investor.
- How long you plan to invest also has tax repercussions. This is because tax rates differ as per holding periods too. For example, if you invest in stocks and sell before a year, then you have to pay a 15% tax. But if you sell after a year—even if it is the 366th day—then you pay zero tax.
- You may already be getting enough tax deductions. In such cases, you choose investments on different parameters. But you need to know about your tax status in advance.

A 5-Step approach to building an efficient investment portfolio through tax planning


Step 1:
Consider your income, the various tax allowances and exemptions that you can avail so that your gross taxable income and tax liability is reduced.

Step 2:
Choose expenses and investment products that can get you a tax deduction under:
a. 80C (ELSS, EPF, PPF, Life Insurance premium, Bank FDs, NSC, etc.)
b. 80D (health insurance)
c. 24 (Home Loan interest repayment)
d. 80CCD(1B) (additional Rs 50,000 deduction through NPS)

Step 3:
Consider taxation at the time of maturity, sale or redemption. Then, choose the investment with the least tax liability.

Step 4:
Hold on to investments for longer tenure to avail extra tax benefits. For example:
• Real estate: Hold on for over 2 years to get indexation benefit. You can then purchase 54EC bonds for Rs 50 lakh to reinvest your profits and reduce tax further.
• Debt Funds: Redeem after 3 years to get indexation benefit. You then get taxed at 20%. If you sell before 3 years, then you will be taxed as per your Income Tax slab rate.

Step 5:
Offset capital losses against capital gains from the same type of investment.

A last word
Meaningful tax planning can create a significant difference to your investment corpus in the longer run.

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Financial Advisors and Wealth Managers: Their Roles and Importance

Posted by Mehul Kothari | Published on 06 Feb 2019

Earning money is one thing. But managing it and ensuring that it works for you in the right way is an entirely different ball game. Planning towards wealth management can be a tough task, especially for people who are already juggling between their hectic work life and family life. Financial advisors are more than just investment advisors. They are central to wealth management and can provide assistance to people considering their financial setting. That’s the reason why a wealth manager or a financial advisor is quite popular among investors around the world.Let’s look at how you can use wealth managers in the right way.What is wealth management?Wealth management is a service offered by professionals who are well-versed in the areas of finance and investments. These advisors not only dole out investment advice to their clients, they also offer guidance in other financial aspects such as retirement planning, accounting, legal and tax planning. In other words, portfolio management services in india is also known as the holistic approach by a professional helps investors to reach their financial goals in the most efficient manner.How to find the right wealth manager?There are a number of wealth management companies and financial advisors available. As a result, finding an advisor who is the right fit for you can be a bit tricky. Be on your guard, if an advisor starts off by directly offering an exotic investment option. That is the characteristic of a sales person rather than a financial advisor.Using a wealth manager in the right mannerThe best financial advisors or wealth managers begin by creating a strategy that can sustain and enhance your financial assets based on your economic condition, objectives and comfort factor with risk. Once a plan is established, the manager will connect with you regularly to revise or renew your objectives, assess and rebalance your financial portfolio, and analyse if supplementary services are required, with the primary aim of remaining in your service through your lifetime. A good wealth manager offers advice based on your financial situation and life goals.Good wealth advisors identify problems and offer suggestions on how their clients can manage their money differently.They tell you how much to save, what amount of risk is suitable for you, how much insurance you require, how you can benefit from tax deductions and so on. Many advisors also provide insights not only on retirement planning but also estate planning. ConclusionFrom organizing and managing finances, assisting in financial windfall, planning for retirement, reviewing your insurance and more, the role and importance of financial advisors and wealth managers cannot be understated.As an investor, it can be quite helpful to employ the services of a financial advisor. But ensure that you select an advisor who is the right fit for you, and who doesn’t have a conflict of interest

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Making your investor profile

Posted by Mehul Kothari | Published on 14 Feb 2019

Investor profile is all about knowing your preferences in investment decisions. Before you start investing, it’s important to know the type of investor you really are. More often than not, we assess our strengths and weaknesses differently. Going through a formal investment profiling would help in creating a portfolio for the long term without having to re-evaluate every now and then.So, making an investor profile depends on various factors like risk tolerance, investment goals, investment time horizon and changing financial circumstances and needs.To determine your investor profile, you could ask yourself a few questions that can help you self-evaluate.▪ Goal-based profiling This can be understood by taking your income and expenses into consideration and then evaluating your disposable income. Calculating your disposable income is important. It tells how much money you can invest every month. Once that is evaluated, there are a couple of funds that need to maintained. They are: o Contingency fund with at least 12 months’ expenseso Medical emergency fund for an illness which may or may not be immediately covered by health insuranceo Child’s education fund o Retirement fund Tip: There is not much you can do about your fixed expenditure like EMIs or other loan repayments. However, you can take stock of your discretionary expenditure and create a headroom for investment. ▪ Investment horizon This can be broadly classified as short-term, mid-term or long-term based on your tenure of investment. o Short-term investments are made for immediate goals in the next three years. These investments need to be kept handy and not be prone to volatility. Thus, it needs to be kept in a cash or liquid fund for easy access. Such investments are usually done to meet regular cash flow requirement and emergencies. o Mid-term investments can help you meet your financial goals in five to seven years. Since the tenure is not long enough, your investment can be parked in medium-term debt investments or bank fixed deposits or even balanced funds because market volatility does not affect its liquidity after three years. o Long term investments are for more than 10 years or indefinite timeline. Thus, equity exposure can be taken for long term investment needs.Tip: The earlier you plan for your investments, the better it is so that it can be planned well ahead and the power of compounding can really work and do wonders for your portfolio! ▪ Investment profile Once the disposable income and the investment horizon is known, the very objective of the investment needs to be ascertained. To determine an individual’s investment profile, his risk capacity, appetite and tolerance need to be known.✓ Risk tolerance is the amount of risk you can take in your investment portfolio without losing your sleep over the volatility of the portfolio✓ Risk capacity is the amount of risk you can afford to take so that your financial goals are not jeopardised. ✓ Risk appetite is the amount of risk you need to take in order to fulfill your financial goals. The combination of all three (as depicted in the picture) is the risk profile of the individual. Tip: You need to determine your risk-taking capacity and investment objective together so that you can maximize returns on your investment portfolio without taking too much risk exposure. ▪ Investment experience If one has a considerable experience in investing, his risk-taking capacity is more accurately determined than others since he knows what is expected from each investment. For new investors, it is inevitable that a new investment option needs to be explored bone-deep before taking the plunge.Tip: Age is often synonymous with lesser risk since time horizon is low. ▪ Asset allocation Asset allocation is all about choosing an investment strategy and products based on your risk appetite. Please note that it’s important to review your asset allocation once a year as it can change with time due to change in your investment goal and risk tolerance. Tip: Equity is healthy and good for your portfolio but so is debt. A mix of the two blended with your investment objective and horizon can be ideal. So, monitor your ideal asset allocation at all times, irrespective of the market situations and you will see a marked difference in your overall portfolio.ConclusionIn order to excel in your investments, you need to be completely honest in your evaluation of your investor profile. Self-evaluation can be quite tricky at times and thus professional help can help you define your financial goals. You need to assess your investment needs and then design an investment strategy more appropriately.Disclaimer:  Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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  • What is a Unit Linked Insurance Plan, Types & Benefits
    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

    What is ULIP? Insurance plans are meant to provide financial security to you so that in case of premature demise, your family does not face any financial trouble. Though insurance plans provide unmatched financial security, many individuals also seek good investment returns on their premiums. Keeping this sentiment in mind, ULIPs were launched in the year 2000 when private life insurers were also allowed to operate in the insurance domain. Today, ULIPs have become quite popular, and insurance companies are offering different types of ULIPs to their customers. Let’s understand ULIP meaning in detail and its benefits – What is a ULIP plan? ULIP’s full form is Unit Linked Insurance Plan. A ULIP is an investment-oriented life insurance plan. The plan gives you the dual benefits of investment returns and insurance coverage. The premiums that you pay for the plan are invested in market-linked investment funds, which offer attractive growth. Returns under ULIPs are, therefore, not guaranteed but can be attractive if given time. How do ULIPs work? ULIPs are considered to be a transparent insurance plan as the premiums you pay, and the growth can be easily monitored. When you buy a ULIP, you can decide the amount of premium you wish to pay (provided it is at least the minimum required premium under the plan). The sum assured is then calculated based on the amount of premium paid. ULIPs have different kinds of investment funds which include the following – Equity fund wherein at least 65% of the portfolio is invested in equity-oriented securities Debt fund wherein at least 65% of the portfolio is invested in debt-oriented securities Balanced fund which combines both equity and debt investments for moderate risks and moderate returns You can choose one or more of these investment funds as per your risk appetite. After that, relevant charges are deducted from the premium, and the premium is directed towards the selected fund. As the value of the underlying assets grows, the value of the fund grows. Your investment in the fund also grows, and you get market-linked returns. ULIPs also provide you with various flexible benefits which are as follows – Switching – under switching, you can change the investment funds if your investment preference has changed Partial withdrawal – you are allowed the flexibility of withdrawing from your fund value partially after the first five years of the policy have expired Top-ups – additional investments can be done towards the plan through top-up premiums Premium redirection – you can choose to redirect your subsequent premiums to another fund from the next policy year under this facility Surrender of the plan – if the first five years of the policy have been completed, you can surrender your policy to terminate the coverage before the chosen term. When the policy is surrendered, the available fund value is paid as surrender value, and the plan is terminated. Benefits payable under ULIPs Under most unit-linked plans, you get either a death benefit or a maturity benefit. These benefits are as follows – Death benefit – the death benefit is higher of the available fund value as on the date of death or the sum assured. If the fund value is higher than the sum assured, the fund value is paid otherwise, the sum assured is paid. Maturity benefit – when the term of the plan comes to an end, the fund value is paid as maturity benefit. The maturity benefit can be taken in a lump sum, or you can also avail the benefit in instalments over the next five years through the settlement option feature, which is available under most unit-linked plans. Types of ULIPs Though ULIPs are aimed at creating wealth, there are different types of ULIPs based on the financial goal that they fulfil. These types include the following – Investment ULIPs Investment ULIPs are the most common unit-linked plans which aim to create wealth over the term of the policy. Child ULIPs Child ULIPs are especially designed unit-linked plans for the financial security of the child if the parent is not around. Under these plans, the parent is insured while the child is the beneficiary. These plans have an inbuilt premium waiver rider. If the parent dies during the policy tenure, the death benefit is paid. However, the plan does not terminate. The policy continues, and future premiums are paid by the company on behalf of the insured parent. On maturity of the policy, the fund value is again paid as the maturity benefit which provides the child with the financial corpus needed to pursue his/her dreams. Pension ULIPs These are other specific unit-linked plans which help in creating a retirement fund. Pension ULIPs are deferred annuity plans wherein you pay premiums during the policy tenure to build up a retirement corpus. In case of death, the death benefit is paid. However, if the policy matures, pension ULIPs allow you to receive annuity pay-outs from the corpus created or defer the vesting age from which you would receive an annuity, or withdraw 1/3rd of the corpus in cash and use the remaining fund value to receive annuity payments. Thus, pension ULIPs create a source of income after retirement and are suitable for individuals looking to fulfil their retirement planning needs. Benefits of ULIP A ULIP is popular because of the following benefits it provides – It allows you to avail insurance coverage as well as investment returns in a single product The premiums paid and the benefits received under ULIPs are completely tax-free in nature helping you save tax The flexible benefits of ULIPs allow you to manage your investments as per your investment strategy The different types of ULIPs help you fulfil the various financial goals that you might have Switching and partial withdrawals do not attract any tax making ULIPs tax efficient Since the returns are market-linked, you get inflation-adjusted returns from ULIP ULIPs are attractive insurance policies that give you coverage as well as returns. Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • What is CAGR & How to Calculate it?
    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

    There are different types of investment avenues in the market and each of these avenues promises you a compounded rate of growth if you remain invested. Compounding of return means earning a return on the return earlier generated. So, if you invest INR 100 and earn a return of 10% in the first year, the amount would become INR 110. Thereafter, in the second year, you would earn 10% on INR 110 giving you a return of INR 11. This compounding helps grow and multiply your wealth considerably over a period of time. In the case of market-linked investments, the rate of return is not guaranteed. It varies over the investment period. To know the average rate of return on your investments, the concept of CAGR is used. Let’s understand what CAGR is and how it helps you find the growth of your market-linked investments. What is CAGR? CAGR’s full-form is Compound Annual Growth Rate. The Compound Annual Growth Rate, in simple terms, is the average rate of return of an investment over a one year period. CAGR takes into account two important factors - the time period of the investment and the fluctuations in the return. Since the returns vary depending on the market fluctuation, finding the return over a specific time period becomes difficult. CAGR gives you the average growth rate offered by the investment over the said time period. CAGR shows the approximate growth rate considering that there is no market fluctuation and that the returns earned are reinvested into the investment. How to calculate CAGR? It is very easy to calculate CAGR. There is a CAGR formula which you can use to find the Compound Annual Growth Rate of your investment. The CAGR formula needs three important details which are as follows – Value of the investment made initially (VI) Term of investment (T) Value of the investment at the end of the term (VE) Using these three inputs, the CAGR formula becomes – CAGR = (VE / VI) ^ (1/T) – 1 Let’s understand with an example – Mr. A invested INR 10,000 in a market-linked investment avenue. After 3 years, the value of his investments stands at INR 13,500. The CAGR for Mr.A’s investment could be calculated as below – VI – INR 10,000 T = 3 years VE = INR 13,500 CAGR = (13500/10000) ^ (1/3) – 1 = 10.52% How CAGR helps understand the mutual fund growth rate? Mutual funds are market-linked investment avenues which do not offer a guaranteed rate of return. Since the returns are subject to market fluctuations, CAGR becomes an accurate tool to measure the performance of the fund over a specified period. Investors can check the annual CAGR of mutual fund schemes and use the rate to find out which scheme offers better returns than others. The fact sheet offered by the mutual fund house contains returns generated by the fund over different time frames. These returns can prove to be confusing and so CAGR is an easier alternative to understand the performance of the fund. CAGR acts as a ready reckoner for investors to assess returns from a mutual fund scheme and also highlights the compounding of returns on mutual fund investments. Important points to know about CAGR The investment risk inherent in the scheme is not highlighted by CAGR. CAGR is merely a yardstick to measure the growth rate CAGR proves to be a good measure of growth for a short-term period, i.e. up to 6 or 7 years. If you are considering long-term investments, the growth trends over a short-term period would be averaged out. In such cases, CAGR would give an average rate even if the fund performed excessively well in a two or three year period and then the returns fell in later years. CAGR changes every year since the investment period changes CAGR for two investment funds can match one another even if the funds are different. This might happen if one fund performed well initially and the other one performed well in the last few years. As a result, the performance is averaged out and the CAGR Other modes of calculating returns from investments Besides CAGR, there are other ways to calculate the returns generated by market-linked investments. These ways are as follows – Returns since launch Under this model, the return earned by the fund ever since it was launched and till the present date is calculated. Trailing returns Under the trailing returns approach, you measure the performance of your fund daily, weekly, bi-weekly, monthly or annually. Annualised returns Annualised returns are calculated as the geometric average of the return yielded by the fund over a given period of time. CAGR v/s Absolute returns Absolute returns measure the total return yielded by an investment. The time period is not considered. CAGR, on the other hand, measures the return over a specific time period. For instance, in the previous example, INR 10,000 grew to INR 13,500 over a 3-year period. The absolute return would be 35% since it measures the total return earned on the investment. However, when CAGR is considered, the time period of investments is also taken into consideration thereby considering the time value of money. As such, CAGR comes to 10.52% which is a more realistic figure. While absolute returns show the returns generated, the time period is missing. You cannot figure out how many years it took the investment to generate this return. But CAGR shows you the annual return making it easier to make a judgement on the performance of the fund. The next time you invest in mutual funds, stocks or other market-linked investment avenues, consider their CAGR to choose the fund or investment which has better returns over its peers. So, visit IndiaNivesh and find out a mutual fund scheme of your choice and then compare the scheme’s CAGR with its peers to choose the best performing fund.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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  • Capital Market – Meaning, Types & Functions of Capital Market
    Posted by Mehul Kothari | Published on 20 Nov 2019

    We all know how various companies and industries raise funds for their short term requirement through the money market. However, when they need funds for long term, capital market is their source. The capital market is just like the money market but with a difference that funds raised in the capital market can be used only for long term. In this article, you will learn about the concept of capital market in detail. Let us first understand what is the capital market? Understanding Capital Market Capital market in simple words means the market for long term investments. These investments have a lock-in period of more than one year. Here, the buyers and sellers transact in capital market instruments like bonds, debt instruments, debentures, shares, derivative market instruments like swaps, ETFs, futures, options, etc. Let us now understand the types of capital market. Types of Capital Market The capital market is of two types i.e. Primary Market and Secondary Market. Primary Market The primary market is also called “New Issue Market” where a company brings Initial Public Offer (IPO) to get itself listed on the stock exchange for the first time. In the primary market, the mobilisation of funds is done through right issue, private placement and prospectus. The funds collected by the company in the IPO is used for its future expansion and growth. Primary markets help the investors to put their savings into companies that are looking to expand their enterprises.  Secondary Market The secondary market is a type of capital market where the securities that are already listed on the exchange are traded. The trading done on the stock exchange and over the counter falls under the secondary market. Examples of secondary markets in India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). After learning about the types of capital market, let us now learn about the capital market instruments through which money is raised. Ways of Raising Funds Offer through Prospectus In the primary market, the prospectus is used to raise funds. The company invites the investors and the general public through an advertisement known as the prospectus to subscribe to the shares of the company. The shares or debentures are allotted to the public on the basis of subscription. If the company receives a high subscription then allotment is done to them on pro-rata basis. The company hires merchant bankers, brokers or underwriters to sell the shares to the public.  Private Placement Some companies try to avoid the IPO route to raise funds as it is very costly. Instead, they give investment opportunity to few individuals via private placement. Here the companies can offer their shares for sale to select individuals, financial institutions, insurance companies and banks. This way they can raise funds quickly and economically. Rights Issue The structure of capital market allows the companies in need of additional funds to first approach their current investors before looking at the other sources for finance. The right issue gives the current investors the first opportunity to make additional investments in the company. The allotment of right shares is done on pro-rata basis. However, if the current shareholders of the company do not want to exercise their rights, the shares can be offered to the public. e-IPO e-IPO means Electronic Initial Public Offer. e-IPO is an agreement between the stock exchange and the company to offer its shares to the public through online mode. It is a fast and speedy process. The company here needs to appoint registrar to the issue and brokers to accept the application received from the public. The above mentioned are the ways of raising funds through the capital market. Let us now learn about the various functions of the capital market. Functions of the Capital Market Helps in the movement of capital from the people who save money to the people who are in need of it. Assists in the financing of long term projects of the companies. Encourages investors to own the range of productive assets. Minimises the transaction cost. Helps in the faster valuation of financial securities like debentures and shares. Creates liquidity in the market by facilitating the trading of securities in the secondary market. Offers cover against price or market risks through the trading of derivative instruments. Helps in efficient capital allocation by way of competitive price mechanism. Helps in liquidity creation and regulation of funds. The above mentioned are the functions of the capital market. The capital market performs its functions with the help of buyers and sellers who interact and transact. The structure of the Indian capital market is well regulated and highly organised. The capital markets may be sometimes termed risky because they do not give fixed returns annually. But when looked from a long term perspective, their performance has always been good and rewarding for the investors. If you want to learn more about the capital market or put your savings in the capital market, you can contact IndiaNivesh Ltd.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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