AN INVESTOR may think of several forms of investment, ranging from immovable to movable properties. This article seeks to give a bird’s eye view of certain investments with reference to their return, the tax saving on account of the investment and the taxability of the return from these investments.
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Post-office monthly income scheme (POMIS)
The investor can invest in the POMIS, a minimum sum of Rs 6,000. The maximum amount up to which he can invest is Rs 2,04,000. If the investment is made in joint names, a maximum sum of Rs 4,08,000 can be invested. Investment in POMIS yields a return of 11 per cent p.a., which is payable monthly. In addition to this, a 10 per cent bonus is also payable on maturity.
Thus, Rs 1,200 will be paid as bonus after six years for a deposit of Rs 12,000. This would mean that the effective rate of return under this scheme would be at 12.67 per cent p.a.. The investment is highly secure and also provides a monthly income. The investor can nominate anybody to receive the deposit, on his demise. The amount deposited cannot be withdrawn for three years from the date of opening this account.
If the account is closed and the amount withdrawn prematurely (after one year from the date of opening the account), five per cent of deposit will be deducted and only the balance will be paid. This scheme best suits a person with a requirement for a regular monthly income.
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Tax considerations
The interest earned on POMIS qualifies for deduction under Section 80L of the Income-Tax Act, 1961. The maximum amount deductible under Section 80L for the assessment year 2001-2002 is Rs 12,000. No tax will be deducted at source on the interest out of this account.
National savings scheme (NSS)
The deposits in NSS can be made in all head post-offices and selected sub-post offices. The investor is not allowed to open a joint account. A minimum investment of Rs 100 can be made and deposits in multiples of Rs 100 without any ceiling is permitted. The investor cannot withdraw the amount invested during the first four years of investment. Interest at the rate of 10.5 per cent p.a. is credited annually on April 1. Since the amount invested qualifies for a 20 per cent rebate under Section 88, the actual outflow in the hands of the investor could only be 80 per cent and the effective return will, thus, be 13.12 per cent p.a.
Tax considerations
The amount deposited in NSS qualifies for rebate under Section 88. Rebate under Section 88 is calculated at the rate of 20 per cent on the sum invested, subject to a maximum sum of Rs 12,000 and the rebate so computed is deductible from the tax liability of the investor. Interest credited annually qualifies for deduction under Section 80L. Tax will be deducted at source on withdrawal exceeding Rs 2.500, at 20 per cent.
Public Provident Fund scheme (PPF)
A PPF account can be opened in any post-office, any branch of State Bank of India or its subsidiaries or in specified nationalised banks. The account can be opened in the name of a minor. Non-resident Indians are also allowed to open this account. The minimum investment required to open and keep the account active is Rs 100 per year. The investor cannot invest more than Rs 60,000 p.a. in this account. An investor is allowed to make up to 12 deposits in one year. The PPF account matures after a period of 15 years and the investor can opt to continue the account for further block periods of five years.
No withdrawal can be made till the end of the seventh financial year and only one withdrawal per year is permissible thereafter. The amount of withdrawal cannot exceed 50 per cent of balance at the end of the fourth financial year, immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. The investor can take a loan of up to 25 per cent of amount to the credit at the end of the first financial year, which can be applied for after two years, but before five years from the end of the year the initial deposit was made.
Interest at the rate of 11 per cent p.a. (12 per cent up to January 15, 2000) compounded annually is credited to the account. For instance, if an investment of Rs 10,000 per year is made, the account will mature after 15 years at Rs 34,4055. The unique feature of this scheme is that the amount standing to the credit of this account cannot be attached even under a Court decree. Since the amount invested qualifies for a 20 per cent rebate under Section 88, the actual outflow in the hands of the investor could only be 80 per cent and the effective return will thus be 13.75 per cent p.a (15 per cent up to January 15). The PPF account will best suit an investor who does not have an immediate requirement for funds or for a person who is not in need of regular income.
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Tax considerations
Interest credited annually to this account is fully exempt from tax. The investor is not liable to pay tax on the matured amount at the time of withdrawal. The amount deposited by the investor in a year qualifies for rebate under Section 88. This scheme by far is one of the most premium tax saving schemes.
National savings certificate viii Issue (NSC)
NSCs can be purchased from post-offices and are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. A minimum deposit of Rs 100 should be made and there is no ceiling for the maximum amount that can be invested. The term of deposit of an NSC is six years. No premature withdrawal is permitted. Investments can be made in the name of a minor too.
The investor can raise loans by pledging the certificate as security. Interest at the rate of 11.5 per cent p.a. is compounded half yearly. Since the amount invested qualifies for a 20 per cent rebate under Section 88, the actual outflow in the hands of the investor could only be 80 per cent and the effective return will, thus, be 14.38 per cent p.a..
Tax considerations
Amount deposited (up to Rs 60,000) qualifies for rebate under Section 88. Interest accruing annually on this account is deemed to be reinvested and, thus, qualifies for rebate (except in the last year). Deduction under Section 80L is permissible on the interest credited.
Deposits scheme for retiring employees of PSCs
The retiring employees of a public sector company (PSC) can open this account within three months from the date of receiving the retirement benefits in any branch of State Bank of India and its subsidiaries and also in selected branches of nationalised banks. However, only one account can be opened and operated by the employee, either individually or jointly with the spouse.
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A minimum investment of Rs 1,000 should be made and the maximum investment shall not exceed the total retirement benefits. The entire balance in this account can be withdrawn after the expiry of three years from the date of deposit. Interest at the rate of nine per cent p.a. is credited to this account and interest is payable half yearly on June 30 and December 31 of every year.
Tax considerations
The interest payable on this account is fully exempt from tax.
LIC Policy: Jeevan Akshay
The investor can have an entry into this plan of LIC only at the age of 50 years. A minimum deposit of Rs 10,000 is required to be made. The important feature of this plan is that the purchaser will not be able to get back the amount invested in any event in the normal course. The amount invested will be paid back on the purchaser’s death to the nominees. The purchaser will get a return of 12 per cent p.a., payable monthly on the sum invested. Since the amount invested qualifies for a 20 per cent rebate under Section 88, the actual outflow in the hands of the investor could only be 80 per cent and the effective return will thus be 15 per cent p.a.
Tax considerations
Amount deposited qualifies for rebate under Section 88. Monthly income received is fully taxable but tax will not be deducted at source. The amount received by the nominees of the purchaser on his death is not liable to income tax.
The investment options analysed are only a few out of many options. This article is merely meant to guide investors. The investor is well advised to take into account the several factors that may govern an investment option, including one’s personal commitments. In any case, it is suggested that investors be not lured by high return investments at the cost of security of the amount invested. One should remember this: Higher the return, greater the risk.