Wednesday, April 23, 2014

How to decide between Investment and Tax Saving?

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There is a need to ensure that there is a proper analysis of the entire benefits that are available both for the purpose of taxation as well as otherwise in terms of investment and the kind of returns that can be generated from the investment.

 

A lot of situations demand that the investor make a decision between a tax saving benefit and an investment benefit as these might not be pointing to the same direction. The choice for the investor is then between ensuring that the investment should be done or whether there should be a restriction on the amount of the investment to the extent that the tax benefit is actually available. The choice in this matter has to be considered with various parameters in mind and hence this becomes a crucial question. Here is a look at the issue with special reference to the PPF investment to see how the investor should tackle this situation.

 

The clash in PPF
There is a tax benefit that is available for investments into the Public Provident Fund (
PPF) where the amount that is invested qualifies for a deduction under Section 80C of the Income Tax Act. The total amount of deduction that can be claimed under this section is a sum total of Rs 1 lakh. There are a lot of other areas where the investments would get the benefit under the same section and hence this has to be considered in tune with the other investments so that the overall picture is available. The biggest risk that is faced by a lot of people is that they constantly exceed the Rs 1 lakh total limit due to the investment in other tax saving areas. The maximum amount that can be invested in the PPF is Rs 1 lakh so if the investor puts in the full amount the chances are very high that they would exceed the total Rs 1 lakh investment for tax purposes but the tax benefit would be restricted. The question now for the investor is whether they should make the full investment or should they restrict themselves to the extent that the tax benefit is available.

 

Analysis
There is a need to ensure that there is a proper analysis of the entire benefits that are available both for the purpose of taxation as well as otherwise in terms of investment and the kind of returns that can be generated from the investment. This will help in making a final decision on the matter. As far as the taxation aspect is considered there is a deduction that is present but this can be got through other areas also so this is not the only route through which the benefit can be claimed. On the other hand when it comes to the investment aspect there is a tax free income that the individual will get when they make the investment here. This along with the actual rate of return earned through the interest rate has to be considered because this will show whether the investment can be preferred to other areas that are present.

 

Investment benefits
The focus has to be on the investment benefits and if the current position is considered then the rate of interest is extremely high which is also tax free so when considered on this plane the return is something that cannot be obtained at other places. The other benefit is that the amount here compounds so this also enables the investor to gain at the end of the period of their investment which is quite long. Looking at these factors it makes sense for the investor to consider this as an investment option for their money also and hence this becomes a key consideration. This is the reason why investors can go and put in the maximum amount that is allowed by the PPF account even if they are not getting tax benefit for the full amount as this makes investment sense that will yield better returns than the other options in the market so it is proper allocation for their money.

 

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