Time to reshuffle your investment portfolio

The Union Budget will change the way an individual looks at his investments. It has introduced a new concept as far as tax-saving investments are concerned. From the next financial year, a sum up to Rs 1 lakh will be allowed as deduction from the income of the taxpayer. Investment into the eligible avenues will be reduced from the total income and the figure remaining thereafter will be taxed at the applicable rates. Hand in hand comes a very important concept, which is related to the taxation of such items. There are likely to be even more changes in the future on the way in which long-term investments are taxed, which will impact the way in which individuals undertake decisions as well as their retirement planning. First, let us consider the current structure of the taxation of investments today because only then can one understand the implications of the changes in the future. Currently, the system in force is the EEE method —short form for exempt, exempt and exempt. This might seem to be very technical in nature but is actually quite easy to understand. When one talks of the method of taxation as far as investment is concerned, there are three stages involved. These are common for all, and hence the tax impact at each stage is then considered to see the actual impact that it would have on the final amounts received. The first stage consists of the period when the investment is actually made. Thus, for example, you are investing in a public provident fund. This is the 15-year scheme in which any individual can invest up to Rs 70,000 a year. The investment process when you actually put in the funds is the first stage of the process. The second stage is when the earnings actually take place in the scheme. The earning is on the investment that is made and hence this would be done year after year. The taxation effect of the earnings is the stage where one would have to check out for the impact. The final stage is at maturity when the invested sum along with the earnings if any are returned to the individual. This is usually a lumpsum, and the tax effect here is also considered to see if there is anything that will impact the final payout for the individual. Coming back to the current situation, the process followed is that of EEE. The three exempts stand for the three different areas that have been discussed. What this means is that the investment is exempt when it is actually made then the earnings on it are exempt and finally when the final sum is received that too is exempt from tax. Let us understand this with the help of a couple of examples. Consider a simple case where a person invests Rs 50,000 in a PPF account during the year. In such a situation the amount of the investment at the current stage gets tax benefits under Section 88. This takes care of the first step. The next stage is the earnings. Every year the amount earns cumulatively at the specified rate for that particular year and this is once again exempt from tax so the second stage also falls into the exempt category. In the final stage when the scheme terminates and the individual gets back their money there is no tax to be paid and the third stage also becomes exempt. Consider a second case of an insurance policy. Here too when the premium is paid in all the years the amount is eligible for a rebate currently. This puts it into the exempt category. Every year when the bonus is declared there is no tax on such an amount and hence this is also in the E category and finally when the amount is received together with the bonus then there is an exemption for both the assured value of the policy. Understanding this process is important because this could change in the future. A change at any stage will have to ensure that the individual understands what exactly it means and how they should be tackling this along with the final impact hat they would have to bear on their finances.

Time to reshuffle your investment portfolio

The Union Budget will change the way an individual looks at his investments. It has introduced a new concept as far as tax-saving investments are concerned.

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