Tax Planning: Sec 80C

Sec 80c - The most loved Tax Planning Tool

Of all the sections that offer you tax breaks, Section 80C tends to be most popular, since you get an exemption of up to Rs 1 lakh on contributions to a wide range of investments. Given below are the various options under this section.

• Provident Fund, Public Provident Fund
• You get an assured return of 8% per year on your deposits, which is also exempt from tax
• Remember: Money locked in for at least six years in PPF. PPF are desinged for 15 years lockin
  

• NSCs and 5-year bank FDs
• Assured return of 8-9%. In case of NSCs, the cumulative interest earned every year gets further tax deduction because the interest is deemed to be reinvested
• Remember: Interest is fully taxable. Also, your money gets locked in for five-six years
  

• Life insurance policies
• You get insurance cover and tax breaks on premiums paid, plus all income received is tax free under Section 10D
• Remember: Traditional policies currently give annualized return of only 4-5%
  

• Ulips
• Market-linked returns. Combines insurance with investment. Partial withdrawals are allowed after three years and are tax free
• Remember: Ulips levy high charges of 30-40% of annual premium in initial years
  

• ELSS mutual funds
• Market-linked returns. No entry load on direct investments
• Remember: Withdrawals are allowed only after three years and are tax free
  

• Pension plans
• 33% of the corpus can be withdrawn tax free when the plan matures
• Remember: Money locked up for long term. On maturity, at least 66% gets invested to give monthly taxable pension
  

• School fees
• Fees paid to a recognized school or college (playschools do not qualify) gets tax deduction
• Remember: Tax benefits on fees for only two children
  

• Home loan Principal repayment (Interest part comes under different category)
  
• Especially helpful for taxpayers who don’t have investible surplus to save tax because of large home loan EMI
• Remember:Tax benefit only if the house is self-occupied. Can’t claim benefit along with HRA exemption. But if your job involves constant transfers, then you can claim both HRA exemption and the exemption on Home Loan provided you have bought the house in your permanent place of residence.
  

Extraaa Innings on PPF

Few extra things to understand on PPF

1. The tax saving limit under section 80c is 1 lakh and you can invest 1 lakh. For this you have to open account in the name of your spouse or child. You can save 70,000/- in your account and 30,000/- in other account.

2.The time of 15 years is excluding the FY in which you opened the account so in total the time is 16 years.

3.After 16 years also you can continue with the same PPF account and the extension will be in the phases of 5 years each and you can get extension as many times as you want.

4.In case for few years you don't pay minimum Rs Rs 500/- which is to be paid every year, your account is considered as inactive but you can get it activated by paying penalty of Rs 50/- for the no. of years for which it remained inactive along with 500/- deposit.

5.If you keep on depositing Rs 70,000/- every year till maturity period, and as the deposit will attract 8% interest, so you end up getting 21 Lakhs at the end of maturity period.

Till that time you would have paid Rs 70000 for 15 years. So Total payout = 10 Lakhs 50 Thousands Only.

The Building Blocks of Portfolio

The Five most important and must have things in each and every portfolio are :

1. Life Insurance (Term Insurance must): Each and every person who has financial dependents (Married, Kids, dependent parents) must have a good Life cover through Term Insurance. This must be taken at an early stage of life for the longest term possible.
2. Health Insurance (Must due to higher cost of medical expenses): This is extremely important now a days, because of rising health-care expenses. A Family must be covered with a Family Floater plan for a good amount (Rs 5 lacs) depending on your budget.
3. PPF (Safest investment): Each and every portfolio much have debt exposure and PPF is an excellent investment product for anyone, backed by government , its 100% safe and one of the most efficient and tax efficient products available, with post-tax returns of 8% , its a must have in every one's portfolio
4. SIP in Mutual Funds (for Long Term): For long term investments, its hard to beat this . For long term investments Equity must be the route and for systematic and disciplined investing , SIP is the best way to channelize your money . Considering the un-debatable growth for Indian economy , no can afford to miss Equities for long term investments.
5. Contingency Fund (Cash + Liquid Funds): Each and every portfolio should consist of a suitable amount of cash and liquid investments to meet unforeseen and emergency expenses. Its best to have money equivalent to 6 months of expenses in contingent fund. You can also put 1-2 months expenses as Cash (Savings Account) and rest into Liquid funds (Fixed Deposits for very very less term, 3 to 6 months) which may also provide you some returns.

Now, that we have listed down the components of any sound financial plan, let us analyse what we gain from each of the above mentioned elements:

1. Capital Appreciation : With SIP in mutual funds and PPF, the capital appreciation should happen to a great extent , PPF would provide stability and assured returns, where as Equity will gives an exceptional returns .
2. Liquidity : We have already covered that Contingent fund should be able to provide good Liquidity in times of emergencies
3. Risk Management :Term Insurance and Health Insurance will take good care of your finances in case of medical emergencies. SIP will take care of the market volatility. PPF can be the pillar of strength on whose steady returns on which the rest of your portfolio can be built.
4. Fulfilment of basic needs and lifestyle desires: Once the basic needs are taken care of with the help of term insurance, health insurance, PPF, and a suitable contingency fund, you can strive to achieve lifestyle goals through growth products like Mutual Funds.

Though the above may sound very basic, they form the building blocks on which any financial plan will stand strong and stand tall.

Lets take an example to know better

Assuming your monthly salary 30,000 (Net Income) then we can divide it as below :-

Monthly Expenses

Home Rent 9,000
Grocery Expenses 3,000
Car/Bike Expense 3,000
Mobile Expenses 1,000
Miscellaneous Expenses 4,000
==========================
Total 20,000

Monthly Investment Options

Term Insurance premium 750 (Aegon Religare) (35 Lacs for 30 Years)
Health Insurance premium 750 (ICICI Lombard Plan D: 2 Adults and 2 Kids)
PPF (Yearly 42000) 3,500 (PPF Form Post Office : Pdf file)
SIP (Tax savings Mutual Fund) 5,000 (Value Research: Know better about Mutual Funds)
===============================
Total 10,000

These investment options will also cover the 1 lacs limit for your tax benefit under section 80C. Home Rent will cover tax benefit under HRA.

Contingency Fund

Monthly Expenditure @ 20,000 for 6 months => 1,20,000
Cash in savings account should be atleast Rs 40,000 /-
And rest 60 to 80 Thousands should be in Liquid Funds(Fixed Deposit).

If anyone having more income than above stated and don't know what to do, I am ready to provide my account number

Wishing you all happy investing !!!

Analysis of LIC - Jeevan Varsha - Part 2

This article in continuation to my previous article on "Analysis of LIC - Jeevan Varsha - Part 1".
Pls go ahead and first read article "Analysis of LIC - Jeevan Varsha - Part 1" and then only read this article to get the better idea of what I want to explain.


Recap of Analysis of LIC - Jeevan Varsha - Part 1:

We discussed about LIC policy - Jeevan Aastha.
Premium Amount is Rs 78,000 per year.
Need to pay this premium for 9 years.
Policy term is 12 years.
Sum Assured - 5 Lacs
Survival Benefit :

• 9.2 Lacs (Simple way)

• 11.75 Lacs (Amount got at every quarter reinvested in PPF)

Then we have done calculation and found that the CAGR returns comes to 6.4 % in second case when we inteligently reinvested amount got at the regular intervals from this policy.

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Basic Thought

If a person can pay a premium of Rs 78,000 per year, then do you think the Sum Assured of 5 Lacs is sufficint to him? Not at all.
As per my guess his/her salary has to be minimum 5 Lacs per annum.

He is totally Under Insured. As already discussed we will not be such uncaring in deciding the right policy for him and will not under-insure him at any cost.
We understand importance of Insurance and his Family needs and the tenure of cover should be 25-30 yrs , not just 12 yrs , His Insurance requirement is around 30-40 lacs and we will provide it anyhow , even if the investments are to be compromised.
So we will try to provide him 35 lacs cover for 30 yrs.

I think this is sufficcient !!! whats do you say ?

So a person who pays 78,500 per year, can divide his 78,500 yearly payment into two parts, For insurance and Investment separately . You know what i would suggest, its Simple Term Insurance and Investment in PPF or MF's.
Both the cases have got tax benifit as per 80C.



For Defensive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

So he is left with 68,900 (78,500 - 9,600), for his investments . If he invests this in PPF (though there is limit of 70,000 , lets assume he can do it) . he will get around 14.12 lacs (annuity formula) at the end of 12th year.

He can then take out 1.73 lacs out of this to fund for his Insurance premium for next 18 yrs left, still the amount left would be better than the Jeevan Varsha . The other alternative is to keep the money in some Fixed Deposit and keep using the interest amount to fund Insurance premium for next 18 yrs. There can be other ways of doing it, but the main point is that we have done better than Jeevan Varsha in all respects - Sum assured, Years of Insurance and Returns from Investment.

This investor can also use Balanced Mutual Funds or Debt Mutual Funds for investments.


For Aggressive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

He can invest 68,900 yearly (5741 per month) left in Equity Diversified Mutual funds using SIP every month in max 3-4 mutual funds.

He should expect to get around 12% compounded returns over 12 yrs, and your money should grow to 18.5 lacs (Disclamer: 12% is again not guaranteed)


Summary and Notes

We have seen the policy from a broad level and see its main components, we have not seen minutescale details, because they are not significant enough to change the views anyways.

I just want to prove that the endowmenent policy in this case Jeevan Aastha is too complicated to understand and also gives very less returns compared to other investments.
Even the PPF investments are better than this.

Conclusion

Term Insurance + (MF or PPF) is a great combination , its simple easy to understand .The main point is to first Insurance your self sufficiently and then think about investments .
Get the insurance cover for atleast 6-8 times of your current salary even better to take 10 times (Approx Sum Assured should be 30-40 Lacs). Then only think about investments.

And when every you think, think about what is simple and easy to understand.
Always follow KISS policy (Keep It Simple Stupid).

Analysis of LIC - Jeevan Varsha - Part 1

I always try to write the articles in the simplest possible way I can.
If still anyone of you have any doubt/queries/suggestions/clarification or need help on tax planning, pls mail me back. I will be more than happy to resolve your queries.
I remind that this is FREE service so pls mail me with your doubts/queries on any finance related queries not only on TAX planning, but any finance related queries.

Also you can suggest me some topics on which you want to get the information. I wil ltry my best to prepare article on that.

Today I am passing a chat conversation with one of my friend to all of you.

One of my friend had a friendly argument on why she should NOT go for LIC policies as that are the safest option for TAX saving. Her stake was she will not loose per money as LIC has Govt of India backing.

Very True, you will not loose ur money in LIC, but did you thought of what the value you gain for your investments in endowment policies ?


Chat Conversation

------------------------------- Start of chat conversation ------------------------------

Sachin : Hi, How r u ?
Xyz : Ya, I am fine, How about you.

Sachin : Me too. Have you done ur tax planning for this year
Xyz : Yes almost done, I have taken a LIC policy - Jeevan Varsha.

http://www.licindia.com/Jeeva_varsha_features.html

This is the latest and the best policy ever by LIC. You can see so many adds in TV and newspaper.

Sachin : But I recommended not to go for it :(
Xyz : The LIC agent is our close family freind. A good friend of my father.
He will never give any bad advice to me.
Anyways its ok, as I will not be losing my money. I will get the amount that I am investing + they are providing a good insurance cover + their is bonus amount which I will get at the end of policy tenure.

Sachin : What is the yearly premium you are paying for this and what is the insurance cover ?
Xyz : Yearly premium is Rs 78,500 /- and sum assured is Rs 5 lacs. What you say on this?
Sachin : I need to calculate it in my way. Need to put some complex formulas to get the actual returns. As the LIC has made this policy (Jeevan Varsha) so complex, that it is difficult to understand to peoples like me.

Note: Rs 78500 is the premium for a 30 year old person for the 12 years insurance cover for Rs 5 lacs.

Xyz : Not at all. Its very simple. I will explain.
Sachin : Yeah, pls explain.

Xyz : Policy tenure is for 12 years, but we have to pay premium only for 9 years :)
Means I have to pay premium only for 9 years and get the insurance cover for 12 years.

In case of death any time during policy term. I will get Rs 5 lacs (we will not consider it for time being).

In Case of Survival, I will get as below
In 3rd Year : Rs 50,000 (10% of SA)
In 6th Year : Rs 1,00,000 (20% of SA)
In 9th Year : Rs 1,50,000 (30% of SA)
In 12th Year: Rs 2,00,000 (40% of SA)
Bonus at the end : Rs 4,20,000

isn't it good that I am getting returns start from 3rd year of policy.
I am getting back all of my money + I am also getting some extra bucks + an insurance cover for Rs 5 lacs.

Sachin : So total amount returned is (50,000 + 1,00,000 + 1,50,000 + 2,00,000 + 4,20,000) = 9,20,000

And the amount you paid to LIC is 78500 * 9 = 7,06,500

Xyz: See you understood it very easily, I am getting more than what I invested. Moreover I am also insured for Rs 5,00,000 for 12 years. Isn’t it a good policy ?

Sachin : let me do some jugling here. will tell what is the exact return from this policy.

Xyz: Ya sure, Bye for now

Sachin : Bye.
------------------------------- And here ends our conversation ------------------------------

After going through the above conversation, you will feel that this is very good policy.
As you are paying only Rs 7 lacs , that too in installment and getting return Rs 9.2 lacs.
Right from 3rd year LIC is paying back the amount + You are getting the insurance cover for Rs 5,00,000.

Though the insurance cover is less, still for a common person this policy looks very attractive.

What’s your take on this ??????? YES / NO

----------------------------------------------------------------


I did my calculation as usual and came with the below results ==>>
Here you need to be very good with math’s OR you should trust some one like me



Returns from this Policy at the end of 12 years
Now how do we calculate the returns from this policy for this person. There are two way (Models) of doing this. One way is that we can just add the amount of money she receives from the policy and see how much total money she gets at the end of 12th year. The other way is to assume that she is investing her money (which she gets at 3rd , 6th and 9th) year somewhere , so that she can get it at the end of 12th year (this way is a better way of calculating and the ETHICAL way as I will not be misleading you) .

First Model: Amount is just added

Total Sum received = 50,000 + 1,00,000 + 1,50,000 + 6,20,000 = 9,20,000

Second Model: Amount received is invested @8% such that she recives it at 12th yr (for 9 yrs , 6yrs and 3 yrs). I am considering 8% because we are assuming safest option here.
She will be investing in PPF, which gives 8% returns TAXFREE.

50,000 after 9 yrs : 99950 [ 50,000 * (1.08)^ 9 ]
1,00,000 after 6 yrs : 158687 [ 1,00,000 * (1.08)^ 6 ]
1,50,000 after 9 yrs : 299850 [ 1,50,000 * (1.08)^ 3 ]
Bonus + 40% of SA after 12 years : 6,20,000

Total = 99950 + 158687 + 299850 + 620000 = 11,78,487

lets calculate the CAGR return from this policy , We have to use annuity formula for it for 9 yrs and then Compound interest formula for 3 yrs . The formula would be
A = [Annuity part for 9 yrs] [Multiply] [Compound interest part 3 yrs]

A = [ P * [{(1+i)^9 - 1 }/i] * (1+i) ] * [ (1+i)^3 ]

where
A = Total money she accumulated till now
P = yearly Premium (78,500)
i = CAGR return which we want to find out


What we have done here ?

For this person we have calculated annuity returns for first 9 yrs (because she is making the payments for 9 yrs) , then she does not pay anything for 3 yrs (Very happy), so we have calculated compound interest for next 3 yrs(remeber power of compounding) . It may be a bit complicated to understand i know but bear with me on this.
As I have already told that LIC had made this policy very complex to understand even for peoples like me.



For First Model
The value of i which satisfies this equation is 3.3%, Yes you read correct, no typo here.

(78500 * (1+.033) * ((1+.033)**9 - 1)/.033)*(1+.033)**3 = 919262

Rs 9,19,262

But this is not a good way of seeing things , so lets look at Second Model (Ethical one).

For Second Model
The value of i which satisfies this equation is 6.4% . This is the true representative of returns .

(78500 * (1+.064) * ((1+.064)**9 - 1)/.064)*(1+.064)**3 = 1175443.41

Rs 11,75,443

So as per Mathematics, Xyz will be getting her returns back @ 6.4 percent.
Pls remind that she is also investing back the amount that she is getting from LIC every third year @8%.
So now you yourself think what is the actual returns that LIC is paying you back if you had not invested it @ 8% PPF option.


If she would have invested the same amount in PPF for 9 years and keep it as it is for next 3 years (total 12 years), Same case as above then the return will be ==>

Rs 13,33,650

In simple terms PPF investment @ 8% will beat the LIC's top policy Jeevan Varsha for

Rs 1,58,207
Both the options have tax benefit under section 80C.

Amount gained in PPF compared to LIC policy: -

One Lacs Fifty Eight Thousand and Two Hundred and Seven Rupees.

isnt it a good amount ????

Note: I will explain about insurance cover in my next mail. That will be continuing to his mail. But by any means do you think the insurance cover of Rs 5 lacs is sufficient for the person who is paying premium of Rs 80,000 yearly ??

If one can pay a premium of Rs 80,000 then his/her salary has to be atleast Rs 5 Lacs. Agreed !!!

So that person it insured only for his/her one-year income by paying so much of hefty amount.

So in my next mail I will not be such Uncaring as this policy and will provide an adequate insurance cover (30 Lacs) along with very long tenure (30 Years).
And will try to see can we beat the Jeevan Varsha policy. You know we can and we will do it !!!

==========================================================


Once again I remind to all of you, Never ever go for endowment policies from any company.

Do you know what is the commission that insurance agents get on your policies?

It’s from 10% to 70%.... You have read correct, 70% commission on Jeevan Anand policy.

And the commission these agents get in TERM policies is just 2 %.
And this is the reason these peoples do not tell you about term policies.


I have no intentions to hurt anyone but I am sure that most of the Insurance agents DO NOT know the actual returns and the real value of the product they are selling. They just want to sale it, as this is the bread earner for them. These people will only think of their commissions. And this is the reason that your own very near relative who is an insurance agent will not recommend you a Term policy.


So pls do the calculations yourself and get the actual returns, as it is your own hard earned money.

As your company is paying you salary in Lacs. Just think if they do not pay bonus or do not increase your salary then you will cry like any thing and tell of everyone you meet that my company is worst of all.

If you have an ability to earn money, you should also learn on how to save the money.
Start with learning some basic mathematics!!!