Tax Planning

Tax Rules & Rates keep changing depending upon which political party is in power. IncomeTax Act 1961 and the budgets from time to time determines how you get taxed and at what rates.

However, when one looks at what goes into investment, the avenue like the exemptions, deductions and rebates can be used to augment future earning capacities or improving quality of life or even asset acquistion.

First, let's look at enhancing future earning capacities by investing into the Sec 80 C investment universe upto Rs 1 lakh without limit for most of them except the PPF.


Item (Holding period) : Pre-Tax rate of return pa
Bank Deposits 5 year, : Fixed rate *7.5-8%
ELSS 3 year (not assured): 30-50%
PF : 8.5%
PPF (lt 70,000) : 8%
PO FD 5 years : 8%
NSC 6 years : 8%
Infrastructural Bonds
(NHAI,REC) : 8-9%
Insurance Policies : 3-5%

It is true one can use the expenses route as well to save taxes. One can improve quality of life in that manner. The deductions for Educational expenses Sec 80(C), that for Health Insurance premiums Sec 80(D) and Donations to Charity Sec 80(G) are of this nature.


The interest you paid upto 1,50,000 Sec 24(b) on the Housing Loan and its principal repayments Sec 80 (C) effected also fetch you tax concessions while creating an asset.

Certain Capital Gains are not taxed at all....

1. Sec 10(35) exempts Capital Gains from Mutual Fund units, if held for more than an year.
2. Sec 10(38) exempts Capital gains arising out of Your equity investments held for more than 12 months

You get CG exemption under Sec 54 (EC) if you deposit within 6 months your sales proceeds upto Rs 50 lakhs in a financial Year of any assets into bonds issued by Rural Electrification Corporation or National Highways Authority of India.

Ceratin Incomes are also not taxed....

1. Sec 10(15) exempts fully interest from post office term deposits
2. Sec 10(33) exempts the income from Mutual Funds
3. Sec 10(43) exempts Reverse Mortgage cash flows received by the Senior Citizens

Supplement your earning potential by leveraging on such opportunities. Planning will ... avoid or reduces surprises.

Asset Allocation By Institutional Investors: Is it any way different?

Quite often, I have wondered why a Mutual Fund scheme is capable of earning better than an insurance scheme or PF and sometimes overwhelmed by the performance of ULIPs over the rest.


To get an idea about earning capacity of the schemes, one needs to know about regulatory requirements binding the earning capacity of each class of them:

1. Mutual Funds
2. Insurance
3. New Pension Scheme(NPS)
4. Non-Govt PF
5. Banks

Mutual Funds can be creative in their portfolio with different objectives for each scheme and thus varying asset allocation. Thus emerges infinite possibilities of risk-return combinations. Beyond that they are limited by single company and single instrument investment norms, mostly guided by governance norms.

But look at insurance companies, they are not permitted to invest their funds freely as the MFs. THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (INVESTMENT) (AMENDMENT) REGULATIONS, 2001 clips the outer limit for these companies as low as 25% Minimum in GOI securities. Unless it is a GOI securities fund, the MFs need not concentrate on them. Thus by birth itself, Insurance schemes have a clipping on their earning capability.

The NPS, the new kid in the street is akin to MF scheme, but with a Management Mandate of distinctive asset allocation according to age and preference of the customer. Pension cannot be managed as a MF scheme mainly because of the difference in the holding period and purpose for which it is invested. Now there are 6 Pension fund Managers to choose from and 3 asset classes of Equity, Corporate Debt & Govt Debt for you choose the required asset combination. The NPS costs in India are the least compared to other countries.

The default plan allocates the investment mix and change according to the age of the subscriber. At the lowest entry age of 18 years, auto choice entails an investment of 50 per cent in E, 30 per cent in C and 20 per cent in G.
The ratios will remain unchanged till the subscriber turns 36, when the ratio of investment in E and C will decrease annually, while the proportion of G rises.
By the time the subscriber is 55 years, G will account for 80 per cent of the corpus, while the share of E and C will fall to 10 per cent each..

At present, the equity investment, E consists of index funds that replicate the Sensex or Nifty portfolio. The C segment includes liquid funds, corporate debt instruments, fixed deposits and public sector, municipal and infrastructure bonds. The pure fixed investment instruments, G include state and central government securities.

The Non-Govt PF was permitted to invest upto 15% in Equities. The EPF and approved PFs are yet to accept these norms.

The banks are guided by capital to risk weighted asset ratio of 12 per cent. There is a differential risk weighting for different risk class of assets possessed. Under the current standardised methodology of risk weighting, Triple “AAA” to “AA-” rated assets need to be risk weighted at 20 per cent. However, with the credit rating sinking to “A”, the risk weighting increases to 50 per cent. That being the case, banks cannot give you a rate of return on your deposit, beyond a small band.

Thus when the earning capability itself is bounded by Regualatory Requirements, one needs to select the investment that best suits his purpose than just another product.

It is better to take control yourself at times.