Category: Personal Finance

Tevin Joseph

It’s good that you are making use of Section 80C of the Income Tax Act. Deploying money in instruments listed under this section can help in two ways. One, the wide range of instruments under Section 80C can help plug gaps in your portfolio and build a long-term corpus. Two, the tax break on money deployed up to ₹1.5 lakh a year in Section 80C instruments can help reduce your tax outgo.

Depending on your income slab, the annual tax savings on deployment of ₹1.5 lakh under Sec 80C can range from ₹7,800 (for those in the 5 per cent slab) to ₹46,800 (for those in the 30 per cent slab).

Note that the tax deduction under Section 80C is available only for those in the existing tax regime (that has higher tax rates along with benefit of tax deductions and exemptions). If you opt for the new tax regime (that has lower tax rates but without the benefit of most deductions and exemptions), the Section 80C tax break is not available.

Section 80C instruments can be expenditure-, insurance- or investments-based.

Home loan principal repayments/prepayments and tuition fee payments for your children are examples of spend-based instruments. Insurance-based instruments include pure term life insurance plans, traditional life insurance plans and unit-linked life insurance plans.

The chunk of 80C instruments is though investment-based. These include the Employees’ Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), tax-saver bank and post office deposits, pension plans, National Savings Certificates (NSCs), Senior Citizen Savings Scheme (SCSS), Sukanya Samriddhi Yojana, National Pension System(NPS) and equity-linked savings schemes (ELSS).

ELSS mutual funds invest in equity; pension plans such as the NPS allow equity investments, too. EPF, too, invests in equity to a small extent. The other investment-based instruments put money in relatively safer debt avenues.

There is no one-size-fits-all approach when it comes to 80C instruments. Decide based on your age, investment objectives, risk profile, return expectations, liquidity needs and gaps in your portfolio.

First, if you have dependents and are not sufficiently insured, it’s good to take adequate life insurance through online termplans. The premium paid on these is eligible for the 80C deduction. Next come the investment options.

PPF, NPS

If you don’t have early liquidity needs, the PPF is among the best debt options under 80C.

With a 7.1 per cent tax-free return for the October-December 2020 quarter (this can change each quarter) and annual compounding, the PPF can help build a long-term corpus. The tenure of a PPF account is 15 years and it can be extended in blocks of five years. PPF enjoys an exempt-exempt-exempt (EEE) tax structure — the investment gets you a tax break under Section 80C, and there is no tax on both the interest accrued and the maturity amount.

The NPS, a very cost-effective pension plan, is another long-tenure investment option that can help you plan for post-retirement income. Depending on your risk appetite, you can choose from among various schemes that have different allocations to debt and equity.

The returns on the NPS are market-linked and get added to the corpus over the years; they are not paid out regularly. On retirement, up to 60 per cent of the corpus can be withdrawn tax-free, and annuity has to be bought with the balance 40 per cent corpus. The annuity income is taxable though.

ELSS

ELSS schemes invest in stocks and are suitable for those with a higher risk appetite and a long-term horizon. If you do not have adequate exposure to equity, make use of the Section 80C opportunity to adjust your asset allocation and invest in well-run ELSS plans offered by mutual funds. The risks are higher but so are the potential returns.

ELSS funds have a lock-in period of three years. You could go for systematic investment plans (SIPs) in ELSS plans to ride out volatility in the market, but each SIP investment will have a lock-in period of three years.

The tax-saver five-year fixed deposits with banks and post offices are also a good option for conservative investors with a medium-term horizon. The investment gets the 80C tax break, but the interest is taxable.

While Section 80C is a good starting point, do invest beyond these instruments as per your capacity and accumulation targets, even if you don’t get tax breaks on the additional deployments. This will help you accumulate your intended corpus and maintain your lifestyle in the long run.

Apart from 80C instruments, there are other ways to save taxes.

Send your queries to personalfin@thehindu.co.in

The following comments are with reference to the announcement on Portfolio coming out on Sundays instead of Mondays.

Great news! BusinessLine back on Sundays from December 6.

—Saranathan Rengachary

Waiting for this. Not for nothing we call it ‘The White Paper on Business’. Keep up the good work.

—@kanvindev

Looking forward to it. BL is a great source of business and financial news.

—Ragavendhra Perumall

I would like to thank you for changing the Portfolio section to Sunday instead of Monday in BL. This was also my and many other readers’ wish.

—Raghavendra KS

Good move. Hope it is available to online subscribers, too.

—Aakash Rungta

Our response: Of course! You can read it online at thehindubusinessline.com/portfolio/

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This is with reference to the Big Story ‘Your I-T return ready reckoner’ published on November 30. With respect to the LTCG (long-term capital gains) on equity shares, the I-T Department clarification says that we have to fill up all the share transaction details only for grandfathering purpose.But there is no place to put the LTCG calculations in one simple step. That means everyone has to provide all the transactions undertaken throughout the year, and that is a seriously tedious task.

—Sree Hari Kulkarni

Our response: Transaction-wise details on LTCG have to be keyed in the ITR form for assets purchased before January 31, 2018. As per G Srinivas, Managing Partner, Brahmayya & Co, Bengaluru, there is an option to fill the consolidated amount for the sale of capital assets purchased after January 31, 2018. However, there is no option to fill the consolidated amount for the sale of capital assets purchased before January 31, 2018..

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The below comment is with respect to the story ‘Why you should hold the stock of Shree Cements’ published on November 30.

How do you write such good articles! Even your articles related to banking are amazing. I used to read the BusinessLine online edition, but then stopped it. Now, I’ll restart the same.

—Melwin Mathew

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This is regarding the story ‘DSP Value Fund NFO: Value investing, with exposure to global stocks’ published on November 30. The story was clear and informative and drove me to learn a few terms you used in the story (TRI, P/B, P/E ROE, Debt & Money Market Instruments, etc).

—Adarsh

The new peak margin rules of the Securities and Exchange Board of India (SEBI) announced through a circular in July became effective on December 1. This could mean an end to excess intraday leverage offered by brokers to their clients. As per the new rules, brokers are mandated to collect stipulated margins upfront, i.e., before a trade is initiated.

While regulation requires upfront collection of minimum 20 per cent of the transaction value as margin for cash segment, brokers can even collect margin equal to the sum of VaR (value at risk) margin and ELM (extreme loss margin), which can top 20 per cent.

In case of futures and options (F&O), the margin collected upfront should be no less than SPAN (standardised portfolio analysis of risk) margin plus exposure margin.

VaR margin intends to cover the largest loss that can be encountered for 99 per cent of the days and ELM, collected in addition to VaR margin, is like a second line of defense if the losses go beyond 99 per cent of the day. SPAN margin and exposure margin for F&O are like VaR margin and ELM for the cash segment.

What is peak margin?

Beginning December 1, market participants should meet at least 25 per cent of their peak margin obligation. From March 1, 2021, 50 per cent of the peak margin obligation should be met; 75 per cent from June 1, 2021 and the entire margin obligation should be fulfilled from September 1, 2021.

Peak margin obligation is the minimum margin that a trader or an investor should maintain either in the form of funds or securities based on all open positions at any given time. It is calculated based on minimum 20 per cent for stocks and minimum of sum of SPAN and exposure margins for F&O.

Say, a trader buys one lot of Nifty futures and stocks worth ₹1 lakh. The margin requirement for Nifty futures is about ₹1.5 lakh i.e. 15 per cent of the notional value of ₹10 lakhs (futures price multiplied by lot size) whereas for stocks it is ₹20,000 (i.e., 20 per cent of the transaction value). Therefore, the peak margin obligation for this trader will be ₹1.7 lakh and this requirement should be satisfied even if these trades are squared off intraday.

What has changed

The major change is that the participants should now satisfy both peak margin and end of day (EOD) margin obligation while earlier EOD margin requirement was the only matter of concern. Thus, brokers had this leeway for giving additional leverage for intraday positions. In other words, the margin collected was way less than the margin actually required, on the condition that those trades will be closed by the end of the day.

For the purpose of peak margin reporting, henceforth, brokers will be sent four snap shots a day by the clearing member (CM) with the client wise margin amount that should have been collected upfront. This will put an end to excess intraday leverage.

Traders and investors also have to deal with the limited usability of the proceeds from sale of shares. From December 1, only 80 per cent of the sale value can be utilised as margin on the day of selling. That is, if someone sells shares worth ₹1 lakh, only ₹80,000 can be used to fulfil margin obligations of new trades.

What it means to you

Higher intraday margin requirement means that the return-on-investment (ROI) on intraday trades can drop significantly, especially in the F&O segment. With peak margin obligation required to be maintained for every trade, traders or investors continuously looking for opportunities will need higher buffer capital.

Though traders and investors seem to be disadvantaged, only those who have been using higher leverage to make intraday profits consistently seem set to lose. Otherwise, these measures can bring down excessive speculation and instil discipline, thus reducing chances of losing.