Identify a few Tax Saving Debt Investment Instruments for a

Conservative Investor

Presented By: Enrollment No.Alpha Nayak E13CC1079751Anupriya Singh E13CC1078654Karishma Biswal E13CC1081714Smruti Ranjita Suar E13CC1079865Subhasantak Mohanty E13CC1081206Sujnani Kumari Gupta E13CC1080945

ET FinPro

Module

06

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Agenda1. Introduction

2. All about a conservative investor

3. What are debt instruments?

4. What are tax saving debt instruments?

5. Various debt instruments

6. Three identified tax-saving debt instruments

7. Public Provident Fund (PPF)- features

8. National Savings Certificate (NSC)- features

9. Senior Citizens Savings Scheme (SCSS)- features

10. Tax treatment of PPF, NSC and SCSS

11. Conclusion

Introduction Time and again, business newspapers have talked about tax-saving instruments.

This undoubtedly implies the term “tax-saving instrument” to be a very significant one.

Here is what it is, TAX, in general, is nothing but a financial charge imposed by a  state or the functional equivalent of a state for various public expenditures, evenly drawn from the rich, the not-so-rich (famously known as the middle class) and the poor.

And, on a factual basis, rich people have to pay more as they earn more, the not-so-rich ones, at the same time, have to pay less as they earn less, comparatively, and the poor ones, on the other hand, are helped by the government as they have no fixed source of income, in the form of subsidies, thereby solving the most insolvable task of socio-economic disparity within a nation.

For, it is when we know what tax is, only then can we know how important saving it can become.

So, while making an investment decision, an investor has to look for the trade-offs between risk, return and liquidity (keeping tax-saving as an inbuilt parameter, at the same time).

All about aConservative Investor

• Conservative investors have risk tolerances ranging from low to moderate. Those who have low risk tolerance are often extremely uncomfortable with the stock market and wish to avoid it entirely.

Who is a conservative investor?

• Capital preservation.What does he require mostly?

What are Debt instruments?

Debt based instruments usually have the nature to guarantee the principal amount of the investor and hence come with lower investment risk in comparison

to equity based instruments.

Debt instruments should be part of every investor's investment portfolio.

Inclusion of debt based investment instruments provides stability to the portfolio and reduces the overall portfolio risk.

Although debt instruments are considered a relatively safe investment option, there is a hierarchy of risk even among these.

In fact the pure debt based instrument does not provide the returns even to cover the on going inflation rate which means a negative return on a net basis.

Source: Source: http://articles.economictimes.indiatimes.com

Various Debt Instruments

• Bank fixed deposits• Post office deposits• Company deposits

Deposit schemes

• That invest in Government Bonds, Treasury Bills, Corporate fixed deposits, Bank’s Bonds, Corporate NCDs, etc.

Debt mutual funds

• Public Provident Fund• National Savings Certificate• Senior Citizens Savings Scheme

Saving schemes

But, not all of these debt instruments are tax saving in nature.

What are Tax saving debt instruments?

What ?

Why ?

These are certain debt instruments that have specific tax exemptions under Section

80C of the Income Tax Act, 1961

So that, one could save some portion of his/her taxable income from

getting washed off, thereby, making it a totally apt investment option for

a conservative investor .

Three Tax Saving Debt Instruments For a Conservative Investor

All under section 80C of Income tax Act, 1961

Public Provident Fund (PPF)

National Savings Certificate (NSC)

Senior Citizens Savings Scheme (SCSS)

(For senior citizens)

Public Provident Fund (PPF)Minimum Investment INR 500/- in a financial year

Maximum Investment INR 1,50,000/- in a financial year

Interest option Compounded Annually

Interest Rate 8.70%

Tenure 15 yrs.

Premature withdrawal

Withdrawal is permissible every year from 7th financial year

from the year of opening account. Withdrawal amount must not exceed 50% of the balance at

the end of the fourth year, or 50% of the balance at the end of

the immediate preceding year, whichever is less.

Maturity Period After maturity of 15 years, it can be extended in block of 5 years.

Loan Facility Available from 3rd year.

Deposit optionCan be made in lump-sum or in 12 instalments every year.

Premature closure Not allowed before 15 years.

Tax treatment Investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.

Source: http://wealth18.com/public-provident-fund-scheme-ppf-account-features-tax-benefits/

National Saving Certificate(NSC)Minimum Investment Rs. 100

Maximum Investment No upper limit

Interest option Compounded half yearly

Interest NSC VII Issue – 8.5% , NSC IX Issue – 8.8%

Tenure NSC VII Issue - 5 years, NSC IX Issue - 10years

Mode of holding Individual/Joint/Minor through the guardian

Eligibility Resident Indian National

Tax treatment Investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.

It is advisable to build a ladder by investing every year: By buying (NSCs) every month for Five years – Re-invest on maturity and relax - On retirement it will fetch you monthly pension as the NSC matures.

Source: http://taxguru.in/income-tax/nsc-tax-benefit.html

Senior Citizen Saving Scheme(SCSS)

It is a Government of India Scheme. Interest rate of 9.2% as per April 1, 2013. It is decided by

ministry of finance from time to time. One of the most safest investment option (offered by GOI). It is Liquid in nature. Account can be prematurely closed i. After 1 year / before 2 years @ 1.5% amount will be

deducted from deposit. ii. After 2 years @ 1% amount will be deducted from

deposit.

Source : http://www.indiapost.gov.in/posb.aspx

Features of SCSSMinimum Investment Rs. 1000 and in multiples thereof.

Maximum Investment Rs. 15 Lakhs.

Interest option Quarterly.

Interest Payment dates 31st March, 30th June, 30th September, 31st December.

Tenure 5 yrs.

Extension of AccountA depositor can extend the account for a further period of 3 years (request has to be submitted within one year from maturity )

Eligibility An investor who has attained the age of 60 years or above. VRS (Voluntary Retirement Scheme) above 55 Yrs. Below 60 Yrs.

Tax treatment TDS is deducted at source on interest if the interest amount is more

than INR 10,000/- p.a.  Investment under this scheme qualifies for the benefit of Section

80C of the Income Tax Act, 1961 from 1.4.2007.

Tax Implication of NSC,PPF and SCSS

For NSC : It falls into E-T-E(Exempt-Tax-Exempt) mode of taxation. Deposits  up to Rs. 1.50 lakh  in NSC qualify for Deduction u/s 80C of the Income Tax Act. Accrued interest on NSC also qualify for deduction u/s. 80C. NSC interest is taxable. However, as it is a cumulative scheme (e.g. interest is not paid to the investor but instead

accumulates in the account), each year’s interest  is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Sec 80C, thereby making it

tax-free. Only the final year’s interest, when the NSC matures, does not receive a tax deduction as it does

not get reinvested, but is paid back to the investor along with the interest of the earlier years

and the capital amount.

Contd…

Source : http://taxguru.in/income-tax/nsc-tax-benefit.html

Tax Implication of NSC,PPF and SCSS

For PPF: It falls into E-E-E(Exempt-Exempt-Exempt) mode of taxation. Annual investment into PPF account is eligible for deduction u/s 80C. Interest earned on the PPF account is tax free. Maturity amount is also tax free. Source : http://finotax.com/ppf/account

For SCSS: It falls into E-T-E(Exempt-Tax-Exempt) mode of taxation. TDS is deducted at source on interest if the interest amount is more than INR

10,000/- p.a. Investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act,

1961 from 1.4.2007.

Source: http://www.indiapost.gov.in/posb.aspx

ConclusionIn today’s world of wealth and profit maximization, rather optimisation, that which happens to be the aim of all, who would’nt want better returns on investment?

In the end, all that differentiates one investor from another is the risk he/she would’ve opted for, all along the way. And it’s an inborn tendency of every homo sapien to have the want of keeping more, than giving.

For, ‘Who would ever want to part with his/her hard earned money

(in the form of TAX), until parting with it be made a compulsion!’

And that’s where saving tax turns into an inevitable necessity and the demand for various tax saver schemes crops up.

Hence, a few tax saving debt instruments that we have identified for a conservative investor are:PPF

NSC

SCSS

&