It’s time to do your tax-saving investments with March 31 just a month-and-a-half away. Given the volatility in the market, investors are taking a cautious approach towards equity-linked savings schemes, say financial advisors.
In these uncertain times there are some options available in the fixed-returns space such as tax-saver fixed deposits, LIC Jeevan Aastha and PPF, among others, but it’s crucial to understand their tax treatment to know the actual rate of return.
Life Insurance Corporation launched Jeevan Aastha, a single-premium product, in December and is scheduled to close the scheme on January 22. It offers five-year and 10-year investment options to customers.
“If you invest Rs 1 lakh for five years, then you are likely to earn Rs 1.39-1.46 lakh in the range of 6.9-8%, depending on the age bracket you fall. If you invest the same amount for 10 years, then the return will be in the range of 7.4-8.4%, which would work to Rs 2.04-2.2.4 lakh.
The returns decline with the age of the proposer on account of mortality charges. Although, here it’s assumed that the individual’s age is 35 years,” says Nikunj Kedia, financial advisor and director of Park Financial Advisors.
A five-year fixed deposit enjoys tax benefit up to Rs 1 lakh under Section 80C. However, the returns on these deposits are taxable and what you earn on these deposits depend upon the income tax bracket in which you fall. If you invest a lakh in an FD, which promises a return of 8.5%, then the post-tax return can fall as low as 5.61% (you earn Rs 1.30 lakh approximately).
If you are still keen on investing in an FD, then this is the right time to do so, says Suresh Sadagopan, certified financial planner, founder Ladder 7 Financial Advisory Services.
“With the RBI cutting interest rates, FDs are no longer a lucrative option as banks have started cutting deposit rates. Plus, the high taxation in FDs makes it a relatively unattractive option for investors in the higher tax brackets. As part of the 80C deduction, if an individual is looking at investing in fixed deposits, he should lock-in rates now since the rates will reduce further in the next couple of months,” he added.
Considering that, Jeevan Aastha has a better tax treatment as interest accrued is exempt from taxes, according to industry experts. Also, investments in Jeevan Aastha are exempt from tax under Section 80 C of the I-T Act. On the other hand, interest from fixed deposits is added to one’s income and taxed as per slabs unless it is part of the 80C deduction available to an individual.
Let us assume that your tax-saver deposit is fetching you a return of 8.5% per annum. Now, if you fall in the 20% income tax bracket, then your effective post-tax return would be around 12.4% per annum.
The simple calculation is if you fall in 33% tax category, then you lose 33% on the final return you earn from your FD. Hence, FDs are quite suitable for lower tax brackets they become unsuitable for high tax bracket investors on account of lock-in and low post-tax returns.
