Prices good for Tax-saving plans

Only two things, they say, are certain – death and taxes. Oddly, both topics are usually avoided in polite society. The annual ritual of year-end investing to save on taxes is almost five months away.

So why bring up this dreadful talk about taxes now? It’s not March already, by any chance, is it? No, don’t bother to look at your calendar. It’s only November. But there are attractive investment opportunities
available today, if you plan to look at tax-saving equity options – equitylinked savings schemes (ELSS) or unitlinked insurance plans (ULIPs).

Silver lining to the market cloud

The recent drop in equity markets has brought stock valuations down to compelling levels. Mutual fund NAVs have plunged, some by as much as 50 percent over the past three months. While this is obviously unfortunate for existing investors, it’s extremely good news for those who are evaluating their investment options under Section 80C.

This fire sale at the stock markets won’t last beyond two to three months.

A large part of the current uncertainty in the global markets is expected to play out by December, as it’s also the end of the accounting year.

Ringing out the old

The end of the accounting year means a large part of credit and carry trade issues will have to be unwound or settled. Here too, the Reserve Bank of India (RBI) has taken its foot off the brake and stepped on the gas. It has cut the cash reserve ratio (CRR) – the percentage of deposits that banks must keep with RBI, the repo rate – the rate at which the RBI lends to banks, and the statutory liquidity ratio (SLR) – the amount banks must maintain in the form of cash or approved securities.

Liquidity will take two or three months to return to normal. More cuts will likely follow, and slowly but surely, the corporate sector will see the credit supply return to normalcy. This should give a fillip to domestic demand and should put growth back on the 7-8 percent trajectory.

Markets will bottom out

China is grappling with a severe demand slump, and growth is likely to slip to five percent, at least temporarily . This would leave India as the top performing country next year. But remember, the markets will bottom out, just as they topped out before things turned bad. The bottom is likely close at hand.

It’s possible the bottom is already in place, and we may see a higher bottom with another drop later this month or early next month.

What it all means for you

So, what does all this have to do with tax planning? Well, if you plan to invest in ELSS, do so in three or four parts over the next two months. The markets could rally back to reasonable levels from January. Take advantage of the current bargain-basement prices to invest in equity and save tax in one go. Waiting until March could mean you lose out on any rally in the next three to four months.

Equity funds

Do all equity funds have tax benefits ? Equity-linked saving scheme (ELSS) funds are special open-ended equity funds that carry tax benefits under Section 80C. Other equity funds do not offer Section 80C benefits. Can you invest in ELSS at any time? Yes. Although people tend to wait until March, you can invest in them any time of the year.

Will the lock-in period begin in March? No, the three-year lock-in doesn’t begin from the end of the financial year in which you invest – it begins right from the date of your investment

Source : Economic Times (22-11-08)

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