FACTORS INFLUENCING TO INVEST IN TAX-SAVING SCHEMES

Transcription

1 CHAPTER-VI FACTORS INFLUENCING TO INVEST IN TAX-SAVING SCHEMES

2 CHAPTER-VI FACTORS INFLUENCING TO INVEST IN TAX-SAVING SCHEMES 6.1 INTRODUCTION From time to time, various tax-saving schemes are made available for the individual income tax assessees. These schemes may have different factors such as return, liquidity, safety, risk coverage, old age need etc. which may influence and attract the assessees to invest. Whenever a new investment is made, not only the tax benefit on contribution but also the tax concession on the income arising out of such investment becomes an important consideration. Some investments give high return; some investments ensure high safety; some investments provide loan facility and some investments can be converted into cash quickly. A good investment is one, which ensures safety, profitability and liquidity. Hence, investment planning is nothing but achieving a balance among these three principles i.e. Safety, Profitability and Liquidity. An individual may invest in any one of the various tax-saving schemes that are available. It is usually agreed that there is no substitute for Life Insurance as it covers risk of life and tax benefit under the Income Tax Act for premium paid. The policy maturity amount is also fully exempted from tax. But selecting a right plan is crucial since commitment to premium is usually long term. Shortfall in funds may force one to surrender one s policy. A bank manager may canvass the assessees that the deposits would become double over a period of few years. But interest is subject to tax. If

3 178 interest income exceeds Rs.5000 in a year, tax on such interest income shall be deducted at source. Further, to make a single deposit Rs.50,000 and above, the depositor is needed to disclose his Permanent Account Number (PAN). A deposit in Public Provident Fund ensures total safety of the amount and offers easy liquidity in the form of loan and withdrawals. It is a wonderful money multiplier with tax-free returns, which is very popular among every class of investors year tenure with yearly contributions of very high flexibility makes this scheme very different from other fixed investment options. An investment in 6-Year National savings certificates is a very good instrument for medium term investment. In this scheme, not only the initial deposit but also the interest accrued enjoys the benefit of deduction under section 80C from the Gross Total Income of the assessees. Investment in tax-saving bonds issued by the ICICI Bank and IDBI Bank is eligible for Deduction U/S 80C. TDS is applicable as per prevailing tax laws. The amount invested in Unit Linked Insurance Plan is eligible for Deduction U/S 80C.The dividend could be further re-invested in units. Dividend is also fully exempted from tax U/S 10 (35). Investments in units of Unit Trust of India, units of Life Insurance Corporation of India and units of Mutual Fund, which invests the amount of subscription in eligible issue of capital, are eligible for deduction U/S 80C from the Gross Total Income of the assessees. Income from these investments is exempted from tax. Further, repayment of Flouse Loan

4 179 principal, Tuition Fees paid for any two children of the assessees are also eligible for Deduction U/S 80C. These investments are mainly made by the assessees to reduce their tax liability besides earning return. There are many risks attached to these tax-saving schemes. Each tax-saving scheme has its own merits and demerits. The attitude towards these tax-saving schemes differs from assessee to assessee. One may be interested in safety of the saving scheme, another may be interested in return of the saving scheme and yet another may be interested in liquidity of the saving scheme. Among these three categories of assessees, it is not easy to say who is rational and prudent. Hence, choosing an investment scheme by an assessee is not a simple task. Among the various tax-saving schemes available, the sample assessees have given importance only for four tax-saving schemes i.e. Insurance policy, Provident Fund, National savings certificate VIII Issue and Infrastructure Bond. The assessees have not considered the other taxsaving schemes. Similarly, among the various factors that influence investment in tax-saving schemes, the sample assessees have given importance only for six factors i.e. tax benefit, high return, safety, liquidity, risk coverage and old age need. Hence, in this study, only four tax-saving schemes, and six factors considered by the assessees for investment in tax-saving schemes are examined, analyzed and the result thereof is presented. Further an attempt is made to know the awareness of the assessees about the fifteen important income tax aspects, which are fundamental and necessary for tax planning.

5 180 For the purposes of this study, to identify the relative importance of the factors that influence investment, it is decided to use scaling of ranks with the help of scaling the Ranking Technique. Six identified factors are given in the Questionnaire. All the 600 sample assessees were requested to assign rank to all these factors. Each respondent is also instructed to indicate the relative importance of the factor by giving rank I to the most important factor, rank II to the second important factor and so on. For Life Insurance policy, to find out the relative importance of the factors that influence investment, the scale value assigned for the first rank is 6, for the second rank is 5 and so on for other ranks. The Life Insurance policy has a unique feature of risk coverage. The other saving schemes do not have this feature. Therefore, the risk coverage feature is not incorporated in other saving schemes. Hence, for the other saving schemes, the scale value assigned for the first rank is 5, for the second rank is 4 and so on for other ranks. A total score value is computed for each factor by multiplying the number of respondents with respective scale values. 6.2 FACTORS INFLUENCING TO INVEST IN TAX-SAVING SCHEMES Besides tax benefit, the other factors that influence the assessees to invest in tax-saving schemes are high return, safety, liquidity, risk coverage, old age need, loan facility and regularity of income. The importance of these factors is briefly presented below. TAX BENEFIT Whenever a new investment is made, the assessees mainly consider

6 181 not only return but also tax benefit. Real rate of return on investments for the income tax assessees can be calculated by the following formula. Real Rate of return = Rate of Return on investment-(inflation Rate + Tax rate) Rate of return on some investments may be low but tax-free. Rate of return on some investments may be high but taxable. Whenever a new investment is made, the assessees should bear in mind the Real Return, which depends upon the inflation rate and tax rate. Further, if investments or disinvestments in securities are made, without considering the various provisions of tax laws, the investor may find that a great part of the profits is eroded by the payment of taxes. Proper planning could lead to a substantial savings in the amount of tax to be paid. The predominant factor that could influence the assessees to invest in tax-saving scheme is tax benefit. HIGH RETURN Investment is to earn return. The rate of return is one of the factors for a sound investment plan. The interest rate may vary between one investment to other risky and non-risky investments. Individuals who are not assessees prefer to invest in those investments, which give maximum return. But, the Individuals who are assessees want to invest in those investments, which give not only return but also handsome tax benefit. Some investments ensure maximum return but tax concession is the least or nil. For example, fixed deposits and monthly chit schemes in private companies earn good return but no tax concession. Some investments ensure maximum tax benefit and safety but return is insignificant, the example being investment in National savings certificates. However, one should keep in mind that there is no investment that earns high return

7 182 without risk. Risk and return are inter-related. Higher the return higher will be the risk. Lower the return lower will be the risk. SAFETY Generally, every investor is primarily concerned with safety of his/her investment. Whenever a new investment is made, the investor should carefully review the economic and industry trends. To ensure safety of principal, the investor may consider the diversification of investments. A proper mixing investment commitment would reduce loss. While investing fund one should ensure the credibility and financial strength of the institutions. Blindly believing the misleading advertisements and publicity by fly-by-night operators is risky. Schemes offering unexpectedly high returns must be viewed with caution. Safety first and return next is the usual thinking of investors. Credibility of the investing institution is more important than any other factor. However, a highly safe investment will generate relatively low return. Apart from the safety, the investor must also take care of sound liquidity of the instruments. LIQUIDITY Any investment is said to be liquid, if it could be converted into cash as and when required. The salaried assessees at the verge of retirement usually invest in these liquid investments. RISK COVERAGE Some investments are made for return. Some investments are made for Tax benefit. Some investments are made for return, tax benefit and risk coverage. Life Insurance Policies and Postal Insurance Policies are of this category. These investments give return while one is

8 183 incapacitated and unable to earn. The object of insurance is to provide monetary compensation to the family of the insured in case of pre-mature death. OLD AGE NEED Some saving schemes are specifically suitable for old age need. Assessees who are at the verge of retirement may need fund for the marriage or higher education of their children and for their own use. Such assessees may prefer to invest in those tax-saving schemes that ensure immediate liquidity to meet their financial need. LOAN FACILITY Some tax-saving schemes can be pledged as security for raising loan and hence this facility attracts many investors in choosing this investment. Some tax-saving schemes themselves offer loan facility like Life Insurance Policy, National Savings Certificate, etc. Assessees who may need money in interval periods prefer the investments, which offer loan facility. REGULARITY OF INCOME Some assessees prefer to investment in those tax-saving schemes, which give regular income from the instant of investment. The main object is the regular income can also be reinvested in some tax-saving schemes. Flence, regularity of income on investments may also be considered as one of the factors influencing the assessees to invest in taxsaving scheme. The factors influencing the assessees to invest in Insurance policy, Provident Fund, National savings certificate VIII Issue and Infrastructure Bond are examined, analyzed and result thereof is presented below.

9 LIFE INSURANCE POLICY In table 6.1, the factors influencing the sample assessees to invest in insurance policy is analyzed and ranked by using the scale and score value. TABLE 6.1 SCALE AND SCORE VALUE FOR FACTORS INFLUENCING THE SAMPLE ASSESSEES TO INVEST IN INSURANCE POLICY: SCALING THE RANKING TECHNIQUE Scale and score va ue for factors Ranks I II III IV V VI Scale value x Total Mean Rank Score Score Factors Tax benefit (f) (fx) I High return (f) (fx) IV Safety (f) (fx) V Liquidity (f) (fx) VI Risk cover (f) II (fx) Old age (f) III Need (fx) Total If x : Scale value. f: No o respondents. From table 6.1, it is found that the tax benefit (mean score 5.152) is the main factor that influenced the sample assessees to invest in Life Insurance Policy. Other factors that influenced the assessees to invest in this scheme, according to their priority are risk coverage (4.268), Old age need (3.577), High return (3.098), Safety (2.880) and liquidity (2.303).

10 185 Hence, it could be concluded that the sample assessees invest in insurance policy mainly for the tax benefit and then for risk coverage PROVIDENT FUND In table 6.2, the factors influencing the sample assessees to invest in provident Fund scheme is analyzed and ranked by using the scale and score value. TABLE 6.2 SCALE AND SCORE VALUE FOR FACTORS INFLUENCING THE SAMPLE ASSESSEES TO INVEST IN PROVIDENT FUND SCHEME: SCALING THE RANKING TECHNIQUE Scale and score value or factors Ranks I II III IV V Scale value x Total Mean Score Score Factors Rank Tax benefit (f) (fx) I High return (f) (fx) II Safety (f) (fx) IV Liquidity (f) (fx) V Old age (f) Need (fx) III Total If x : Scale value. : No of respondents. From table 6.1, it is found that the tax benefit (mean score 4.436) is the main factor that influenced the sample assessees to invest in provident fund scheme. Other factors that influenced the assessees to invest in this scheme, according to their rank are high return (3.427), old age need (2,600), safety (2.562) and liquidity (1.980). Hence, it could be concluded that the sample assessees invest in provident fund scheme for high return (8.50% per annum) next to tax benefit.

11 NATIONAL SAVINGS CERTIFICATE In table 6.3, the factors influencing the sample assessees to invest in National Savings Certificate is analyzed and ranked by using the scale and score value. TABLE 6.3 SCALE AND SCORE VALUE FOR FACTORS INFLUENCING THE SAMPLE ASSESSEES TO INVEST IN NATIONAL SAVINGS CERTIFICATE: SCALING THE RANKING TECHNIQUE Scale and score value or factors Ranks I II III IV V Scale value x Total Mean Rank Score Score Factors Tax benefit (f) I (fx) High return (f) (fx) Safety (f) (fx) Liquidity (f) (fx) Old age (f) Need (fx) Total If x : Scale value IV II III V ': No of respondents. From table 6.3 it is found that the factors that influenced the sample assessees to invest in National Savings Certificate according to their rank are tax benefit (3.883), safety (3.629), liquidity (3.132), high return (2.536) and old age need (1.822). Hence, it could be concluded that the assessees are influenced by the factor safety to invest in National Savings Certificate next to tax concession.

12 INFRASTRUCTURE BOND In table 6.4, the factors influencing the sample assessees to invest in Infrastructure Bond is analyzed and ranked by using the scale and score value. TABLE 6.4 SCALE AND SCORE VALUE FOR FACTORS INFLUENCING THE SAMPLE ASSESSEES TO INVEST IN INFRASTRUCTURE BOND: SCALING THE RANKING TECHNIQUE Ranks Scale value x Factors Tax benefit (t) (fx) High return (f) (fx) Safety (f) (fx) Liquidity (f) (fx) Old age (f) Need (fx) I II Scale and score value for factors III IV V Total Score Mean Score Rank I III II IV V Total Xf x : Scale value. f: No of respondents. From table 6.4, it is found that the tax benefit (mean score 4.640) is the main factor that influenced the sample assessees to invest in Infrastructure Bonds. The other factors that influenced the assessees to invest in this scheme are safety (3.595), high return (3.022), liquidity (2.300) and old age need (1.443). So far, various factors that influenced the sample assessees to invest in various tax-saving schemes have been studied. Now it becomes necessary to identify that among these factors, which factor influenced the assessees more to invest in tax-saving schemes. For this purpose, the factors influencing investment in four tax-

13 188 saving schemes are classified and ranked on the basis of their mean score obtained in table 6.5. TABLE 6.5 Factors DISTRIBUTION OF FACTORS INFLUENCING TO INVEST IN TAX-SAVING SCHEMES ON THE BASIS OF THEIR MEAN SCORE Insurance policy Provident fund Tax-saving Schemes National savings certificate Infrastructure Bond Total Score Mean Score Rank Tax benefit I High return III Safety II Liquidity IV Old age benefit V Table 6.5 exhibits that the tax benefit (mean score 4.528) is the predominant factor that influenced the sample assessees to invest in taxsaving schemes. The other factors that influenced the respondents to invest in these tax-saving schemes, according to their rank are risk coverage (4.268), safety (3.167), high return (3.021), liquidity (2.429) and old age benefit (2.361). It could be concluded from table 6.5 that risk coverage is the predominant factor in case of Life Insurance and safety is the predominant factor in case of other saving schemes next to tax benefit for investment by the sample assessees. 6.3 OPINION OF SAMPLE ASSESSEES IN CHOOSING TAX SAVING SCHEMES FOR FURTHER INVESTMENT In the present study, it is thought necessary to investigate and identify which tax-saving scheme is mostly preferred by the sample

14 189 assessees for further investment, if the maximum qualifying limit for taxsaving schemes stands raised. This investigation could help the tax authorities to enhance the qualifying limit for deduction in choosing a particular tax-saving scheme. In this connection, the most important and popular tax-saving schemes identified by the sample assessees such as Insurance policy, Provident fund, National savings Certificate and Infrastructure bond are considered for analysis. Among them, on the basis of scoring technique, an attempt is made to identify the assessees choice for further investment. On the basis of rank assigned by the sample assessees, mean is ascertained and the tax-saving schemes are ranked accordingly. In table 6.6, the four tax-saving schemes are classified, analyzed and ranked on the basis of scale and score value for further investment. TABLE 6.6 SCALE AND SCORE VALUE OF TAX-SAVING SCHEMES FOR FURTHER INVESTMENT: SCALING THE RANKING TECHNIQUE Sea e and score value of ax-saving schemes Ranks I II III IV Total Mean Scale value x Score Score Tax-savings schemes Rank Insurance Policy (f) (fx) II Provident Fund (f) (SPF) (fx) I National Savings (f) Certificate IV (fx) Infrastructure (f) Bond III (fx) Total If x : Scale value. ': No of respondents.

15 190 Table 6.6 reveals that according to the assessees opinion for further investment in tax-saving scheme (on the basis of mean score), the Provident Fund (3.763) stands first, the Insurance Policy (2.825) stands second, the Infrastructure Bond (2.037) stands third and the National Saving Certificate (1.375) stands fourth. It could be concluded that the assessees preference for further investment is Provident Fund. 6.4 FACTORS INFLUENCING THE SAMPLE ASSESSEES FOR TAX PLANNING Increasing income, high income tax rate, problems in tax payment and increasing income of family members are the identified factors, which may influence the sample assessees to adopt certain tax-planning measures. INCREASING INCOME Higher the income, higher would be the tax and tax planning. Whenever income increases, the tax liability also tends to increase. Hence, whenever the income exceeds the tax-exempted limit, the employees have to adopt some tax planning measures to reduce their tax liability. As the income of the salaried assessees increase over a period of years, they have to plan their investments to reduce their tax liability considerably. HIGH INCOME TAX RATE Higher the income tax rate higher would be the tax planning measures and vice-versa. As the entire income of employees is a recorded income, no part of the income is exempted from tax liability.

16 191 High income-tax rate and the recorded income make the assessees to adopt a suitable tax-planning measure. For every rupee earned above the taxable income of rupees two lakh fifty thousand, an assessee pays tax of thirty paise on it. So, the assessees are forced to plan their tax liability and choose a suitable tax-saving scheme. PROBLEMS IN TAX PAYMENT Most of the assessees may feel that payment of tax is a cumbersome and complicated procedure. They want to overcome this complication by investing in a suitable tax-saving scheme. Many assessees may not know even to fillup the income-tax return. They consult the tax experts or consultants to fillup their income-tax return. Once a person is assessed for income tax under the Income Tax Act, he/she will not be exempted from filing the income tax return, even if there is no income in the subsequent year. The assessees could be free from these complications upto certain level of their taxable income by investing in tax-saving schemes. INCREASING INCOME OF FAMILY MEMBERS Sometimes, income of the assessees family members may raise. This may result in surplus fund in his family for further investment. Hence, to reduce the tax liability, the assessees may tend to explore suitable tax-saving schemes. To identify the relative importance of these factors, it is decided to use the scaling of ranks with the help of Scoring Technique. Four identified factors were given in the questionnaire. All the 600 sample assessees were requested to assign rank, to the given factors, on the basis of their relative importance. Each respondent is also requested to assign

17 192 rank according to the importance of the factors. They are requested to assign rank I to the most important factor, rank II to the second important factor and so on. The rank, scale and score value of the factors influencing the sample assessees for tax planning are given in table 6.7. TABLE 6.7 SCALE AND SCORE VALUE OF FACTORS INFLUENCING THE SAMPLE ASSESSEES FOR TAX PLANNING: SCALING THE RANKING TECHNIQUE Scale and score value of factors Ranks I II III IV V Mea Scale value x Total n Score Score Factors Rank Increasing (f) Income I (fx) High income (f) tax rate II (fx) Problems (f) in tax Payment III (fx) Increasing (f) income of family members (fx) IV Total If From table 6.7 it is found that among the various factors influencing the sample assessees for tax planning, on the basis of mean score, the factor increasing income (4.322) ranks first.

18 193 The factors, high income tax rate (3.557), problems in tax payment (2.350) and increasing income of family members (1.785) ranks second, third and fourth. It could be concluded that, for tax planning of sample assessees, increasing income of the assessees seems to be the predominant factor that edges the assessees to adopt a suitable tax-planning scheme well in advance. 6.5 INCOME TAX ASPECTS Tax planning is simple and possible only if the assessees know certain important income tax aspects like computation of income for tax deduction at source, calculation of self-assessment tax, Payment of tax through bank, documents to be attached with return of income, Interest for delayed payment of tax, penalty for non-filing of income tax return, penalty for delayed filing of income tax return, tax-exemption limit for individuals, tax-saving schemes for individuals, Individuals covered under one by six scheme, Last date for filing income-tax return, Interest for excesses or shortage of income-tax paid, time limit for getting refund and assessment order. This may certainly help the assessees to reduce their tax liability and to avoid confrontation with the tax authorities. Hence, an attempt is made in this study to assess the awareness of the sample assessees in this respect. In table 6.8, the sample assessees are distributed and examined on the basis of their awareness on important income tax aspects.

19 194 TABLE 6.8 DISTRIBUTION OF SAMPLE ASSESSEES ON THE BASIS OF THEIR AWARENESS ON IMPORTANT INCOME TAX ASPECTS No of respondentts S.no Income tax aspects Un Aware Aware Total 1 To Prepare estimated income for TDS 341(56.83) 259(43.17) 600(100) 2 To Calculate Self assessment tax 296(49.33) 304 (50.67) 600(100) 3 To Pay tax through Bank 187 (31.17) 413 (68.83) 600(100) 4 Documents attached with I.T. Return 147 (24.5) 453(75.5) 600(100) 5 Interest for delayed payment of Tax 122(20.33) 478(79.67) 600(100) 6 Penalty for non-filing I.T. Return 136(22.67) 464(77.33) 600(100) 7 Penalty for delayed filing I.T Return 116(19.33) 484(80.67) 600(100) 8 Tax exemption limit for Individuals 562(93.67) 38(6.33) 600(100) 9 All Tax-saving Schemes for Individuals 206(34.33) 394 (65.67) 600(100) 10 Individuals covered under 1/6 Scheme 212(35.33) 388(64.67) 600(100) 11 Last date for filing I.T. Return 281 (46.83) 319(53.17) 600(100) 12 Interest for Excess Tax paid 216(36) 384(64) 600(100) 13 Time limit for Revised Return 84(14) 516(86) 600(100) 14 Time limit for getting Refund 72(12) 528(88) 600(100) 15 Time limit for Obtaining Assessment Order 24(4) 576(96) 600(100) Table 6.8 exhibits that more than half of the sample assessees does not know the important income tax aspects stated in table 6.8 except to

20 195 prepare the estimated income for tax deduction at source (43.17) and tax exemption limit for individuals (6.33). Hence it could be concluded that majority of the assessees depends upon the tax consultants for any matter relating to these important income tax aspects. 6.6 SUMMARY In this chapter, important factors influencing the tax-saving schemes, assessee s preference for further investment in tax-saving scheme, the factors influencing the assessees for tax planning and awareness of sample assessees on important income tax aspects were studied. For this study, it is identified that only six factors i.e. tax benefit, high return, liquidity, safety, risk coverage and old age need alone highly influences the assessees in choosing a particular tax-saving scheme. The other factors are not considered in this study because they are not given importance by the assessees. Among the various tax-saving schemes, the assessees mostly contribute to four important tax-saving schemes i.e. Insurance policy, Provident Fund, National savings certificate VIII Issue and Infrastructure Bond. Hence, in this study the four tax-saving schemes alone have been considered. To identify the relative importance of the factors, it is decided to use the scaling of ranks with the help of scaling the Ranking Technique. The six identified factors were given in the Questionnaire. All the 600 sample assessees were requested to assign rank to all these factors on the basis of their relative importance. A total score value is computed for each factor by multiplying the number of respondents with respective scale values. It is found that tax benefit is the main factor that influences the assessees to invest in tax-saving schemes.

21 196 Again it is found that the order of priority for investing in Insurance policy is Tax benefit, Risk coverage, Old age benefit, High return, Safety, and Liquidity. It is found that the order of priority for investing in provident fund scheme is Tax benefit, High return, Safety, Old age benefit and Liquidity. It is found that the order of priority for investing in National Savings Certificates is Tax benefit, Safety, Liquidity, High return and Old age benefit. The order of priority for investing in Infrastructure bond is Tax benefit, Safety, High return, Liquidity and Old age benefit. It is found that the order of priority for investing in tax-saving schemes is Tax benefit, Risk coverage, Safety, High return, Liquidity and Old age benefit. It is found that the choice of priority for further investment in taxsaving schemes is Provident fund scheme, Insurance policy, Infrastructure bonds and National savings Certificates. It is found that the reasons for tax planning, in the order of importance on the basis of assessees choice are increasing income, High income tax rate, problems in tax payment, and increasing income of family members. It is found that the main cause for tax planning is increasing income of the assessees. It could be concluded that the assessees generally seem to depend upon the tax consultants for any matter relating to income tax.