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Suresh Krishnamurthy

WITH almost six months of this fiscal gone by, this is probably the right time to plan tax saving investments for the year. Such investments have changed considerably from the time the laws were amended in February. Now, the high-return tax savings schemes are set to undergo a change for investors as well as those who offer such schemes.

<>Reset for lower returns>: The withdrawal of existing single-premium plans by insurance companies such as Life Insurance Corporation, Om Kotak Mahindra, SBI Life Insurance and Prudential ICICI, and their replacement with lower-return plans, is a case in point.

Bima Nivesh, the single-premium plan offering a tax-free return of around 8 per cent will be the last of such policies to be withdrawn from September 16. The withdrawal of such schemes has altered the relative attractiveness of the tax savings schemes on offer.

<>A broad plan>: At the outset, to get into an annual commitment on tax-linked investment may be highly risky as the tax rebates may be altogether withdrawn in the near future. So, single subscription investments are the better options. It is also necessary to take a portfolio approach to your tax investments rather than an investment-by-investment approach. The comparison should be made between the total return on one portfolio option against another.

<>Portfolio options>: One portfolio option could be to mix tax-free investments with NSC under the Rs 70,000 limit and also invest in infrastructure bonds. That way, the interest received from infrastructure bonds can be completely deducted under Section 80-L. This will effectively ensure that the entire income on tax saving investments is tax-free.

Another portfolio option is to combine only National Savings Certificate with infrastructure bonds. In this option, the entire interest from tax saving investments cannot be claimed under Section 80-L. But the advantage is that in the following years the interest from NSC is eligible for a tax rebate. If the after-tax return from a portfolio of NSC and infrastructure bonds is higher for you, choose that option.

However, some investors may have already invested in NSC in earlier years. For such investors, investing in tax-free options such as single premium plans and PPF may be more suitable this year. Investors who have invested in tax-free options earlier can opt for NSC this year. Investing in NSC and tax-free options in alternate years can help you get the maximum from the available tax incentives.

<>PPF's attractiveness>: The changing yields on available investments have now made the Public Provident Fund more attractive. Its attractiveness had diminished earlier because of the annual reduction in coupon rates. Now, the return on all investments is linked to the market and is around 7 per cent after tax.

However, the coupon rate of PPF at 9 per cent tax-free is attractive. Indeed, this will be brought down to close to 8 per cent next March and, maybe, further down to 7 per cent the following year. That will only equate it with other investments and not make it unattractive. Overall, changing yields have now considerably reduced the unattractiveness of PPF as a tax saving option.

<>Infrastructure bonds>: Next on the menu are the infrastructure bonds to be offered by IDBI. For tax saving infrastructure bonds, those offered by IDBI and Rural Electrification Corporation are the only two options. Now REC is relatively unattractive since the coupon rate offered is only 8 per cent compared to 9 per cent offered by IDBI in its earlier offering.

However, the coupon rate on the offer to be made at the end of the month by IDBI may be brought down. If it is reduced to 8 per cent, REC may be considered more attractive, as the risk involved can be considered lower. If the rate is higher than 8 per cent, it may make sense to split the money between REC and IDBI.

<>Equity-linked options>: As tax saving options, equities too are coming into their own. When the return on risk-free tax saving options was in the region of 12 per cent and above, it made little sense to consider tax-saving equity mutual funds, which had a lock-in period of three years.

Now, however, the expected difference in after-tax return on risk-free tax saving options and tax-saving equity mutual funds appear to have widened considerably.

As such, for investors who have not invested in equity at all, utilising the Rs 10,000 limit allowed for investment in tax-saving equity funds can be considered. Overall, careful planning can help you get a bigger return for each tax-saving rupee.

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