If equities are on your mind, fear not. The market regulator has stepped in with a number of significant changes to encourage more individuals to participate in equity markets. So, besides fixed income investments, if you want to dabble in equities to build a balanced portfolio, go for it.
In one such measure, the Securities and Exchange Board of India has slashed the annual charges for maintaining a dematerialised account. Investors having investments of Rs 50,000 or below won’t have to pay any annual maintenance charge (AMC). Demat service providers cannot charge more than Rs 100 as AMC for investors having investments between Rs 50,000 and Rs 2 lakh.
The proposed cost of maintaining a demat account is just a fraction of what investors, irrespective of their investment amounts, pay now.
However, the rider on such no-frill demat accounts is that it will be available to those individual investors who have only one demat account and are the sole or the first holder.
The Sebi move is in sync with the Rajiv Gandhi Equity Savings Scheme (RGESS) that was announced by former finance minister Pranab Mukherjee in his budget for 2012-13.
According to the budget announcement, first time investors in equities can claim a deduction of 50 per cent on an investment up to Rs 50,000. This tax benefit will be available in addition to the Rs 1 lakh deduction under Section 80C of the Income Tax Act. So, if you are looking to invest in shares for the first time and planning to get the tax benefit as well, you should be looking for RGESS. In that case, a no-frill demat account with no annual maintenance charge will suit you best.
Two to tango
The ubiquitous Public Provident Fund (PPF) and RGESS can be of great help for you in building enough corpus for retirement and other future financial liabilities.
The government has increased the maximum investment limit for individual investors in PPF to Rs 1 lakh and has also realigned the annual interest rate payable under the scheme to that of the government securities of similar maturity (that is, 15 years). As a result, the interest rate on PPF is announced at the beginning of each financial year. For the current financial year, the interest rate on PPF is 8.8 per cent. These changes have given PPF investors more flexibility in allocating their funds with a prior knowledge of how much interest their deposits will fetch.
The Public Provident Fund (PPF) has always been one of the most popular instruments to save tax because it is one of the few instruments that enjoys tax-free benefits at all the three stages — subscription, accumulation and withdrawal.
The full amount of Rs 1 lakh in PPF is available for deduction under Section 80C of the Income Tax Act over Rs 70,000 earlier. That means, you now don’t need to look beyond PPF if you want to take full advantage of the Section 80C benefit. But that wouldn’t be a prudent investment plan.
Choose with prudence
PPF is basically a fixed income instrument where the interest rate varies every year depending on the interest rate on long-term government securities. PPF investment will yield lower income when interest rates go down and vice-versa.
While PPF is a better choice over other fixed income instruments such as bank fixed deposits or debt schemes of mutual funds because of its tax advantage, PPF still falls into the same asset category. For wealth creation, investment in only one asset class is never a prudent idea.
Equity is another asset class that enjoys superior tax benefits in terms of exemption on capital gains tax. Since we are considering long-term investment and tax planning, equity investment makes a case for itself given the high historical returns of this asset class over debt and gold.
For equity investment, consider the Rajiv Gandhi Equity Savings Scheme or the equity-linked savings schemes (ELSS) of mutual funds or unit-linked insurance plans (Ulips). These vehicles enjoy additional tax benefits such as deduction from taxable income, besides exemption from long-term capital gains tax.
Though Ulips can be considered for equity exposure, the problem is you cannot tweak your monthly premium at will.
The advantage of the Rajiv Gandhi Equity Savings Scheme over ELSS and Ulips is that the tax deduction available under this scheme is over and above the Rs 1 lakh limit under Section 80C. RGESS provides an additional deduction up to Rs 25,000, but this tax sop is available to investors having an annual income of Rs 10 lakh or less. However, only first time investors will be allowed to invest in RGESS. So, investors having demat accounts and investments in equity mutual funds or direct stocks are at a disadvantage.
Maintain the balance
Irrespective of whether you are a first-time investor in equities or not, you can still allocate funds between PPF and any tax-saving equity scheme in a 50:50 balance.
You can claim a deduction of Rs 1 lakh under Section 80C by including your annual contribution to the Employees’ Provident Fund (EPF) if you are salaried, school fees for children, principal repayment for home loan and life insurance premium.
Since EPF and PPF provide similar tax benefits and belong to the same asset class, consider your total annual investment in these two funds together while working out the 50:50 balance between fixed income and equity.
Suppose your annual EPF contribution is Rs 50,000. Then you should consider an annual investment of Rs 25,000 in PPF and Rs 75,000 in a tax saving equity scheme. Since you cannot change your EPF contribution at will, you should concentrate on fund allocation between PPF and the tax saving equity scheme.
Start with a 50:50 fund allocation — invest Rs 50,000 in PPF and Rs 50,000 in a tax-saving equity scheme. Since the interest in PPF is calculated on the minimum monthly balance in the account, try to invest the money at one go at the beginning of the financial year.
For equity investment, follow a systematic investment plan, that is invest Rs 4,167 every month to benefit from a declining market. If at any point of the year you see stock prices falling below your expectation, you’ll have two options — either divert the next SIP instalments to the PPF account or keep on cost averaging in equities.
If the interest rate declines the next year, you invest less (say, Rs 25,000) in the PPF account and divert the excess fund to equity investments so that the 50:50 balance is restored.