It's the net return that counts

Whenever strategic investment planning is worked out for a group of investors, special care should be taken about the net return on the investment. The net return on investment is worked out by deducting from the gross amount of yield the income-tax which is payable on such yield. Thus one should consider the net yield concept to come to a conclusion about a particular investment. For example, in case of deposits with private and public limited companies, the maximum gross yield is about 14 to 15% p.a. But if we take the impact of income-tax on an individual having taxable income of more than Rs. 1,50,000, and who is required to pay income-tax at the rate of 30% and 20% surcharge thereon, the net yield works out to be about 9 to 10% only.

Once the net yield is calculated, it necessitates a further probe in other available instruments of investment, specially because the investor is not satisfied to invest in the Fixed Deposit of a company with a net yield of just 9% to 10% of his funds. The other alternatives of such cases are discussed here. Besides, many public limited and government companies now offer interest rate of 12½ to 13½% p.a. only, in which case the net yield works out even below 9% p.a.

Interest Rates Slashed

From January 15, 2000, the interest rates of almost all the postal investment schemes have been slashed, causing a big blow to the common investor in particular. For example, the interest rates under the Post Office Time Deposit scheme which up to 31st December, 1998 used to be between 10.5% and 12.5% have recently been slashed to 8-10.5% only. During the calendar year in 1999, these rates were between 9% and 11.5%. As a result of new interest rates on a deposit for 5 years where the interest rate is 10.5%, the net yield on investment for a person having taxable income up to Rs. 1,50,000 would be about 8%. however, it would be 7% for people having taxable income of more than Rs. 1,50,000 and coming within 30%+20% surcharge tax rates.
Similarly, the interest rates under the Post Office Monthly Income Scheme have now been reduced to 11% pa. from January 15, 2000. Earlier, the rate of interest was 12%, and prior to January 1, 1999 it was 13%. Thus, there has been a 2% reduction in rates of interest in just 13 months.
The changed rate of interest means a net yield of 8.8% p.a. for tax payers paying 20% income tax, and a net yield of 7.7% for tax payers who are paying income tax. The impact of IT Surcharge has not been considered here as it is a temporary feature which is likely to be deleted next year.

Taxable Limits

However, the investment in Post Office Time Deposit Scheme and Post Office Monthly Income Scheme can be made by such a person who has not exhausted his income tax deduction/exemption limit under Section 80L of Rs. 12,000. Thus, both exhausted the 80L deduction limit and are having higher taxable income, say Rs. 1 lakh and above. The changed interest rates under a Kisan Vikas Patra do not make this investment lucrative for rich investors, as the net yield after tax is no better than Relief Bonds. Thus, this is good investment for small and middle-class investors having a taxable income of up to Rs. 60,000. This instrument is also not favourite for those having taxable income much below the exemption limit, say Rs. 50,000. The investment in Post Office Recurring Deposit account and NSS (1992 scheme) also carry interest of 10.5% p.a., thereby making them less investor-friendly.

The investment in NSC-VIIIth issue will now bear interest of 11% p.a. However, a special feature of investment in NSC-VIIIth issue is that the investment qualifies for tax rebate at the rate of 20% of investment as per the provisions of Section 88 of Income Tax Act, 1961. However, the interest accrued under this investment is eligible for tax rebate under Section 88 as also deduction under Section 80L. The tax saving and the yield now is NSC investment is at par with PPF investment. Inspite of reduction of the interest rates on Public Provident Fund from 12% to 11% p.a. with effect from January 15, 2000, investment in PPF still dominates the strategic investment planning scenario. The most important tax benefit attached to PPF investment is that the entire investment income arising on account interest from PPF account is fully exempted from Income-Tax Act, 1961. Thus, for all categories of investors, the net yield on PPF is 11% p.a. in addition to tax rebate on the investment made. If the impact of tax rebate in the first year is considered, the gross yield would be far higher than 11% p.a.

The biggest limitation of the investment in PPF is that the maximum amount which can be deposited in a year is only Rs. 60,000. Inspite of reduction of interest rates to 11% p.a., the PPF account continues to be a hot favourite of individual investors. However, he fears further reduction in interest rates at a later date.

The investment in Relief Bonds of the Reserve Bank of India continues to earn interest rate of 9%. It may be recalled that the interest income from Relief Bonds is completely tax free without any upper limit. The Relief Bonds make good investment for high tax payers because investment in Relief Bonds ensures fixed tax-free interest income at the rate of 9% p.a. for a period of five years.
As a result the change in the statute book whereby amending the provisions of Income Tax Act, 1961, income from all the schemes of UTI and mutual funds have been com-pletely exempted from income-tax without any upper limit, with effect from the financial year 1999-2000. The investors adopting strategic investment planning would better invest in the Monthly Income Investment Plan Scheme of UTI which gives a confirmed yearly tax free yield of 10.75% in comparison with net tax-free yield of 9% on Relief Bonds.

The Fixed Deposits of banks now fail to cheer up investors who have fully exhausted their deduction limit of Rs. 12,000 p.a. under Section 80L. However, for easy mobility, the investors, continue to invest in FDR with a bank. This is good investment instrument, specially for small tax payers, having taxable income up to Rs. 60,000, and who have not yet exhausted the Section 80L limit. For high tax payers who have exhausted the exemption limit under Section 80L and are paying 30% income tax, the net yield would work out to less than 7%.
After comparing results of various investment options on the basis of net return on investments, it was found that MIP Schemes of UTI and the PPF rule the investment arena.