Avail of Tax Shelters
While planning your investments bear in mind the following:
1. Under Section 80C the following investments, inter alia, can be deducted before computing the taxable income: contribution to statutory or recognized provident fund, contribution to public provident fund, life insurance premiums, subscription to National Savings Certificates, contribution to unit linked insurance plan, and contribution to any notified equity linked savings scheme of a mutual fund. Under Section 80 CCC, contributions to certain pension funds can be deducted before computing the taxable income. The maximum permissible deduction under Section 80C and 80 CCC is Rs 100,000.
2. Capital gains (losses) are divided into two categories: (1) long term capital gains (losses) and (2) short term capital gains (losses). Long term capital gains (losses) arise the sale of equity share and other securities that are held for more than 12 months (for all other capital assets the period of holding is 36 months); short term capital gains (losses) arise form the sale of equity shares and other securities that are held for less than 12 months (for all other capital assets the period of holding is 36 months).
3. Long term capital gains (losses) are calculated as follows:
Sale consideration – Indexed cost of acquisition – Indexed cost of improvement – Expenditure incurred in connection with transfer.
4. Long term capital gains from equity shares are tax exempt, whereas short term capital gains are taxable at the rate of 10 percent.
5. If the taxable income excluding the capital gains is less than Rs 100,000 then no tax is payable o so much of the long term capital as is equal to the aforesaid shortfall. You must plan to avail of the tax shelters available to you. Some suggestions in this regard are offered below:
6. Deposit liberally or invest in (a) a recognized provident fund scheme and/or the PPF scheme, and (b) life insurance policy to reduce your tax liability
7. Augment your tax exempt current income by investing in equity shares, mutual fund schemes, and so on.
8. Ordinarily, plan to hold your equity shares and other securities for at least one year to get the benefit of tax exemption.
9. Avoid / reduce long term capital gains by investing in specified securities specified assets, and residential house as stipulated under Sections 54EC, 54ED, and 54F of the Income Tax Act.
It is generally observed that an average investor hates to sell in a bull market because he is afraid that the market will rise further and/or he does not want to pay taxes on his gains. And what is his propensity in a bearish market? He is reluctant to sell in the early phases of the downturn as he regrets the profit missed by not selling around the peak (which he can recognize only with the wisdom of hindsight). Even when further decline occurs, he continues to hold, hoping that the market will reverse itself. Finally, however, he loses his patience and sells at a substantially lower price.
Emotion and poor judgment play a significant role in the lack of investment success. Formula plans have been developed to help investors overcome such human failings. A formula plan essentially prescribes the proportions of your wealth you should hold in stock and bond components. A commonly used and recommended formula plan is the constant ratio formula plan. If you use such a plan you will:
1. Decide in advance the proportions of your wealth you will keep in stocks and bonds respectively.
2. Periodically evaluate what the actual proportions are (it may be noted that changes in market values tend to change the proportions); and
3. Effect whatever switches are necessary to restore the predetermined proportions.