What are some good saving instruments for beginners under the lowest tax bracket?

by Manshu on June 8, 2012

in Investments

Anusha Shashidhar had this question on the Suggest a Topic page the other day, and I think the tax bracket does make a difference in what products you choose because some of the things I wrote in my earlier post on investments like FMPs and tax free bonds will not be so attractive to someone in the lower tax bracket because they can use other products that are easier to set up (bank FD or RD) and don’t have any uncertainty in them either.

I think the following three product categories are worth looking at for beginners who aren’t liable to pay a lot of tax.

1. ELSS Funds: You can still look at ELSS funds this year for your 80C deductions and since you are only at the beginning of your career you have a lot of time on your hands that reduce the risk of equities somewhat. That makes me think that ELSS funds should be in your list of options.

2. Public Provident Fund: Starting with Jitendra Solanki, many people recommended PPF, which is something that I thought of including earlier but the 15 year lock in made me turn away from it. But if you are okay with the 15 year lock in period, then this is a great option as well, especially considering the tax free at maturity aspect of it. Business Line has a great article on how to invest in a PPF.

3. Plain old bank Recurring Deposit or Fixed Deposit: I shared Ramesh’s comment on earlier about a recurring deposit, and I’ll paste it here as well because I think there is a lot of merit in this line of thinking.

Fixed Deposit rates are showing a tendency to decrease rates now. SBI has already reduced by .25%. the same is true for RDs

I think it is the best time to invest for long term say 5 years before rates fall. And if you donot have surplus cash, you can always reserve your berth by investing in RDs for 5 years thus insuring your higher interest rates above 10% for next 5 years even if rates fall below 8%

I think this makes sense and Hemant has shown through detailed calculation that due to the benefit of compounding a fixed deposit at SBI yields quite good for the long term.

I’d also like to say that for people who are in the 10% bracket, sometimes it may not make sense to try to reduce your tax liability to zero because every instrument that reduces tax liability locks in your money and sometimes it is just better to pay the little tax you owe and have the freedom to use your money the way you want.

Finally, my apologies to Anusha and all the others who I’ve had to disappoint when they have asked for personal recommendations, I believe I have a good reason to say no, and if you have the time here is explanation for that.

{ 9 comments… read them below or add one }

Manikaran Singal June 8, 2012 at 9:53 AM

When i started reading this article, i was a bit upset on, how can someone generalise the investment advice. But going forward when i read your explanation on why you say no to the personal recommendations, i loved to see your professional acumen.
This is true that every person is unique…in terms of expenditure behaviour, Risk appetite, family circumstances etc. and thus no single advice gets applicable to all. Any product you invest in should be directed towards a particular goal and should match your expenditure behaviour.
I have seen in many cases where on the advice recieved from TV/Newspaper etc. people invest in some instruments with a so called long/short term view but as they have no control on their investment behaviour, expenses and desires, they end up taking loan to satisfy the same and end up in a financial mess.
For the beginners with no financial planning, i personally feel that they should not enter into a product with lockin period unless its for tax saving…as there investment/expenses behaviour is so gullible that they are bound to make mistakes of increasing there debt side of personal balance sheet. These days FDs/RDs are looking very attractive investment options for lower income tax bracket people, which even has no lockin…
Financial investments needs some maturity from investor’s side.

Reply

bemoneyaware June 8, 2012 at 12:32 PM

This article reminded me of Uma Shashikant’s article I had read in Economic Times. It is not about tax saving instruments.
Why a new saver should opt for bank deposits
Quoting parts from it:

A new saver should ideally begin with bank fixed deposits.
To a beginner, a bank deposit offers a high level of convenience, flexibility and liquidity, while earning a steady rate of return. There is nothing fancy about a bank deposit, which makes it easy to understand and transact. Several product choices in the financial market do not have simple names and are not easily understood. To a new investor, an ‘XYZ Treasury investment flexible income fund, retail plan, growth option’ does not seem like a simple product.

Despite its attractiveness, a short-term mutual fund product loses out as it confuses the new investor with its choices, names, details and disclaimers. Those who can deal with it, can consider this product though. When one begins to put aside savings, it is important to be able to operationalise the investment. Completing another KYC form, ensuring PAN verification for the new folio, and making sure the cheque is issued correctly are all tasks that several fail to persevere with. A bank fixed deposit, on the other hand, is the easiest to create.

There are other advantages too. A young investor, who has just begun to deal with money, may not be able to correctly estimate the liquidity requirement, risks, or need for investment. Saving remains a desirable virtue with no immediate tangible motives.

The first financial crunch can come when a youngster’s job is at risk. Several IT graduates are known to join big names only to seek a new job because they have been posted to a location they do not like, or have been benched.

Once you have accumulated fixed deposits of at least 3-6 months’ salary, you are set to explore other investments. You will hear murmurs about low returns and taxes. Save yourself from greedy advisers, sometimes within the bank itself, who may ask you to buy insurance instead, so that they can earn a trip to Mauritius. Beware. Investing is about asset allocation. Not all investment choices are meant to generate the highest returns, lowest tax, and lowest risks. There is a role for the simple and staid too. Begin your investment journey with the simplest investment choice.

Reply

Anusha Shashidhar June 8, 2012 at 9:56 PM

It’s alright, Manshu! I understand. ๐Ÿ™‚

Reply

Manshu June 12, 2012 at 5:24 PM

I appreciate that Anusha!

Reply

Anusha Shashidhar June 8, 2012 at 10:03 PM

Manshu, I’m rather confused. I just read about DTC and ELSS. Can you tell me how exactly they are linked? Does this mean that ELSS MF no longer offers tax deduction?

Reply

Manshu June 12, 2012 at 5:24 PM

Currently, Income tax is determined according to the Income Tax Act 1961 and the government has been trying to replace that with set of simplified rules called Direct Tax Code or DTC.

In the new DTC, the option of ELSS is not present so when DTC is implemented, you will no longer be able to invest in ELSS funds. However, DTC is not currently implemented so you can still invest in ELSS funds and gain from the tax benefit this year. Let’s see if the government finds time to implement DTC next year or not

Reply

ankm83 June 9, 2012 at 12:03 PM

RD would be a good option, since no TDS is applicable. So you dont have to bother to get tax refund, in case your net salary is below taxable

Reply

Vijay June 14, 2012 at 11:34 PM

Another reason to invest in PPF is that the balance amount in PPF cannot be legally attached by a court in case of a dispute (though the IT authorities can) !

Reply

Manshu June 15, 2012 at 4:36 AM

Oh that’s some piece of news now! I had no idea about this and I’m certain not many people know this. Thanks for sharing.

Reply

Leave a Comment

Previous post:

Next post: