How to Earn Minimum 8 % tax free income ? No No ,Its Not PPF or GPF !

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Earning tax free income is possible that too equal or more than interest rate offered by banks on  fixed deposits  (FD) ! And earning even more than 8 % is possible net of tax. In fact tax free ! This is one of the best tax planning tips for those who have surplus money and always try to earn interest income on fixed deposits .The beauty of this tax planning is that it not only saves tax on earned interest, it also saves you from other hassles like TDS .

Very Important Update

The Finance Bill  2014   passed and and following amendment to section 2(42A) and section 112 of the Income Tax Act , EFFECTIVE from 11/07/2014 has taken away two advantages

  • The units of liquid fund now long term only after 36 months
  • The tax rate will be 20% on long term gains after indexation only

No Tax Free Income from Fixed Deposits !

When one has surplus fund whether one lakh or one crore, people easily think of keeping the money in Fixed Deposit which gives them  8 to 9 % or 10 % of interest annually ,  in some case depending upon period of deposit ,. However, following problems are associated with such investments.

  1. If you prematurely break the FD, there may be penalty in many cases of FD.
  2. Then , the interest earned has to go through TDS on it. Many time bank fails to file the TDS return , so even though they issue you TDS certificate , the 26AS statement of yours does not shows the TDS , which creates another problem.
  3. There is absolute no way to save on tax on the earned interest.

However, even now if the unit is hold for 3 years, indexation will match the interest rate and almost no tax required to be paid

Growth Plan of Liquid For Tax Free income

Are you shocked at the statement? Are you thinking that the statement can not be correct ? Growth Plan of Liquid Funds or Liquid Plus Fund will also give same rate of interest ( in form of value of units ). But such , units become long term investments in just one year of its holding and thus when you go for redemption after one year 3 years now due to Budget 2014, you will get the Indexation benefit for computation of long term capital gains . Some of the liquid fund and their return is given below :

Liquid Schemes 1 mth 3 mth 6 mth 1 yr 3 yr
Baroda Pioneer Treasury Adv Fund(G) 8.36 9.17 10.71 9.30 9.52
Axis Banking Debt Fund(G)-Direct Plan 8.20 8.96 10.41 9.20 NA
Axis Banking Debt Fund(G) 8.00 8.75 10.19 9.01 NA
Birla SL FTP-GA(D) 7.61 8.83 10.35 8.89 NA
Birla SL FTP-GA(G) 7.61 8.83 10.35 8.89 NA
Birla SL FTP-GG-Reg(G) 6.18 7.94 9.75 8.85 NA
Baroda Pioneer Treasury Adv Fund(DD) 6.51 7.15 9.47 8.03 8.29
Baroda Pioneer ST Bond Fund(G)-Direct Plan 5.41 7.78 10.77 7.99 NA
Baroda Pioneer Treasury Adv Fund(DD)-Direct Plan 6.74 7.36 8.79 7.81 NA
Birla SL FTP-GC(D) 6.36 7.52 10.16 7.69 NA
Birla SL FTP-FZ(G) 5.67 7.80 10.63 7.50 NA
Axis Banking Debt Fund(MD) 6.14 6.77 7.98 7.38 NA
Axis Liquid Fund(DD)-Direct Plan 7.06 7.06 7.66 7.22 NA
Axis Liquid Fund(DD) 7.00 7.00 7.60 7.17 7.24
Baroda Pioneer Gilt Fund(D)-Direct Plan 11.49 2.32 6.76 4.27 NA
Axis Income Saver Fund(QD)-Direct Plan -5.15 0.93 9.36 4.05 NA
Axis Income Saver Fund(HD) -6.43 0.89 8.32 3.04 5.69
Birla SL Advantage Fund(D) -4.46 -0.45 15.23 2.84 2.32
Axis Income Saver Fund(QD) -6.43 -0.32 7.89 2.75 5.59
Axis CPO Fund-Sr 5(G) -23.75 -17.58 3.73 0.43 NA
Birla SL FTP-HE(G)-Direct Plan 7.53 9.07 10.56 NA NA
Birla SL FTP-HE-Reg(D) 7.44 8.97 10.46 NA NA
Birla SL FTP-HF-Reg(G) 7.40 8.95 10.47 NA NA
Birla SL FTP-HF-Reg(QD) 7.41 8.12 10.04 NA NA
Birla SL FTP-HG(D)-Direct Plan 8.05 8.90 10.49 NA NA

In fact , the best tax planning is to  invest in the beginning of year and selling ( redemption) after April , next year. This will give you benefit of indexation of at least two years. And what is great is that on average the cost inflation index is 9 % , so after you received , there will always be capital loss on your investment in Liquid Plus fund ( Growth) .

Let us go by an example . So , you have invested RS 1 lakh in a liquid plus whereon average return you get is 8 %. You invest in 10 March  2012 and go for redemption on 14 April 2013. Say , you receive interest of just Rs 8 % . Since it is mutual fund unit, there will be capital gain or loss which will be computed as under :

Cost = Rs 1,00,000 

Cost after applying inflation index = 1,00,000  x CII for FY 2013-14  =

                                                                               CII for FY 2011-12

Cost after applying Inflation Index = 1,00,000  x  939 / 785= Rs 1,19,600

Capital Gains (-Loss)= Redemption value- Indexed Cost

Capital Loss = 1,08,000 – 1,19,600

Capital Loss = 11,400

This long term capital loss can be carried forward for future adjustments.

Compare this , if you chose to  invest in FD , there would have not only tax on Rs 8000 but also maybe TDS ( depending upon quantum of interest credited ). In liquid fund , you got almost same or equal return with no hassle of TDS and even capital loss ( no tax !).

So, it is better to invest in selective liquid fund than FD. Choice is yours !

2 COMMENTS

  1. What actually it is???
    What this article is representing?
    Everywhere words like “This tax planning” is used in this article but what actually is the tax planning, kindly explain the same. Otherwise, its a total waste.