Monday, March 4, 2013

Should one invest in equity for saving tax

As we head towards the end of the financial year,a familiar exercise is set to be repeated.The month of March will see a rush of investors,who are looking to make last-minute investments in various tax-saving instruments.Equity investments that offer tax savings are a popular avenue for most such people.However,is it a good idea to put ones money in an asset class primarily to save tax Sanket Dhanorkar talked to prominent industy experts and here is what they had to say.

Rajiv Deep Bajaj Vice-Chairman & Managing Director,Bajaj Capital 
Yes

Equity not only gives superior returns,as can be seen from the longterm performance
of ELSS schemes,but also leads to a tax saving of up to 30% of the
investment,subject to a limit of 1 lakh.Hence,up to 30% downside is underwritten by the government.Under Section 80C,investments in both debt (PPF,EPF,etc) and equity tax-saving options (ELSS) help save the same amount of tax,up to 30%,depending on ones tax slab.
The difference is in the return potential of the investment.While debt gives,at best,a high single-digit return,ELSS gives returns almost twice as high if held for over three or five years.So,discipline is inherent in ELSS investments due to the threeyear lock-in period,and we know that long-term investment is essential to get the best from equity.Hence,tax-saving and long-term investing work in tandem to deliver the desired results.The performance of ELSS is a case in point.In 10 years since February 2003,ELSS funds have given an average return of 22-23 % per annum if held for three years,and 17-18 % if held for five years (computed on a daily rolling basis).The RGESS outscores debt options both in terms of saving tax as well as return potential.The eligible investors get tax benefit under Section 80CCG over and above the 1 lakh limit under Section 80C

Hansi Mehrotra Managing Director (India),Hubbis 
No

Investing in tax schemes is a sure way to lose money.Such products are not only designed badly,but also cloud the judgement.You are likely to invest in tax schemes just before the end of the financial year,which may not be the best time to do so.You tend not to do your homework on the merits of the investment,analyse the fundamentals and valuation of the stock,or assess the skills of the mutual fund team.This means it may not be a good investment at any time.
Take the RGESS,which provides tax incentives to firsttime stock investors.What are the chances that to be able to outperform the market they know when to enter
it or analyse annual reports to assess the merits of the company,or
assess the skill of the mutual fund Very low.They will probably fall prey to the greed of last years 25% return.In the case of a Ulip,its worse.The investment is bundled with insurance,has no transparency and high sales commissions.Even if investors werent blinded by the tax incentive,they would struggle to assess its merits.
A better way would be to lower tax on dividends and long-term capital gains.Another option could be deduction in the New Pension System.One can invest in it and switch to equity option at the right valuation.
So,one should invest only on merit and ignore tax incentives.Thats just icing on the cake.

Rajesh Kothari Managing Director,AlfAccurate Advisors    

Any good taxsaving instrument should be an investment first and a taxsaver later.Saving
tax should not be a year-end exercise,but one to which considerable time is devoted and is well-planned.
Equity is a good asset class to generate long-term,inflationadjusted,real rate of return.The Sensex has given an annualised return of 15% in the past 10 years compared with the fixed income return of 6-11 % for options ranging from the PPF and NSC to fixed maturity plans of mutual funds.Hence,it is a wellestablished fact that to earn inflationadjusted,long-term returns,equity is the preferred asset class.Saving tax is an added benefit to incentivise retail investors to move their savings from physical investments like gold and real estate to equity.However,like any other asset class,investors should keep in mind that the equity market has an underlying risk and,therefore,they should invest in equity only for the long term.
If one is evaluating different options for investment and tax saving,in the case of fixed income,the PPF and NSC have longer lock-in periods compared with three years in ELSS.Therefore,it is better to invest in equity for the long term compared with fixed income,from the perspective of both liquidity and tax saving.

Aditya Agrawal Managing Director,Morningstar India 

Yes,but...

Many of us tend to go with the flow,investing either in instruments that are being talked about the most or simply follow our friends.However,its important to weigh the pros and cons of each tax-saving instrument.Each product has a different riskreturn profile and it may or may not suit your investment objective.As a first step,you need to assess your investment needs and risk appetite.Financial planning needs to precede tax planning and only then should decide asset allocation and exposure to various instruments.
Equity instruments like ELSS and RGESS are excellent for tax planning and long-term savings.However,they are suitable only for investors who can take a
degree of risk.So,investing in such products merely to save tax
doesnt make sense.Equity can be volatile and even deliver negative returns.Hence,it is important to be aware of the risks and make an informed decision.Fixed income options like the PPF and NSC offer both assured returns and capital protection,which are apt for risk-averse investors.The RGESS provides tax deduction up to 25,000 under Section 80CCG,over and above the benefits under Section 80C,making it attractive,and investors with adequate risk tolerance can consider this.Equity is best suited to deliver over the long term,typically spanning a market cycle.
 
 
 

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