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Invest in Indian Equity and Save Tax!

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Invest in Indian Equity and Save Tax!
For long term goals of children's education and marriage, retirement, etc., Equity investment is a worthy choice. Also, for those who have time on their side (such as, singles and newly married couples), the monthly investible amount is low due to longer maturity tenures.

A good investment is one that grows your money (capital appreciation) as well as provides tax savings for the investor.
Today we shall illustrate how an investor can get effective returns (tax savings + capital growth) by making full use of both ELSS (Equity-Linked Savings Scheme) as well as RGESS (Rajiv Gandhi Equity Savings Scheme) in the FY 2012-13 by a 30 year-old male.

 

Illustration:

For FY 2012-13 (AY 2013-14), a 30-year old male makes the following lump suminvestment, for the purpose of tax savings.
ELSS - INR 1 Lakh;
RGESS - INR 50,000
Total investment made: INR 1.5 Lakhs in FY 2012-13
Investment Term: 5 Years
Average return on investment assumed: 10% p.a.
The Effective Return and Tax Savings are given below:

Income Tax Slab
Tax Savings in FY 2012-13 10% 20% 30%
Annual taxable income in FY 2012-13 assumed INR 5 Lakhs INR 10 Lakhs INR 20 Lakhs
Amount Invested INR 1.5 Lakhs INR 1.5 Lakhs INR 1 Lakh*
Amount eligible for tax deduction INR 1.25 Lakhs INR 1.25 Lakhs INR 1 Lakh
[A] Tax Savings in FY 2012-13 INR 12,875 INR 25,750 INR 30,900
Investment Return
Capital Invested INR 1.5 Lakhs INR 1.5 Lakhs INR 1 Lakh
Investment Value after 5 years^ INR 2.47 Lakhs INR 2.47 Lakhs INR 1.64 Lakhs
[B] Long-Term Capital Gains
(Tax Exempt
INR 97,000 INR 97,000 INR 64,530
Total Return [A+B] INR 109,875 INR 122,750 INR 95,430
CAGR on Capital invested
(incl. tax savings)
11.62% 12.70% 14.34%

RGESS not available for individuals in 30% tax bracket;
^ Average return on investment assumed: 10% p.a;
CAGR (Compounded Annual Growth Rate) is the rate at which an investment would grow if it grew at a steady rate (in our case, 10% p.a.).

Risks involved:

ELSS and RGESS returns are linked to market returns. So there will be a market risk which cannot be avoided, but high risk also comes with chances of higher returns and chances on benefits in future are quite high when a longer term horizon is considered.

Conclusion:

For FY 2012-13 both ELSS and RGESS would be available for investing and an individual looking for long-term savings can make optimum use of the same.

If you have to choose among the 2 schemes - then ELSS proves to be a better investment in terms of tax savings as well as ease of investment. The mode of investment for RGESS is yet to be announced by the Central Government.

InvestmentYogi.com

Read more about: tax investment
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