The last month of the year is very difficult for tax payers in terms of cash liquidity due to requirement to make investments for tax purposes with threat of higher tax looming on the head. But you a solution in hand in case you have investments in Equity Linked Saving Scheme (ELSS) which are out of lock in period even if you are facing cash crunch. Likewise even if you do not have any ELSS investment to recycle, you can take shelter under National Saving Certificates (NSC) to lessen your cash crunch. Let us discuss how to go about it.
Loan against NSC
In case you do not wish to take the risk associated with equity and interest rate NSC is ideal for you. Presently, NSCs have a tenure of five years. The present rate of interest on NSC is 6.80% compounded half yearly. The rate of interest is fixed for the whole tenure unlike PPF account where the interest rate is subject to change every quarter and which applies to the investments already made in the past as well.
The most attractive part about NSC is that you can obtain loans against it from banks. This facility is not available for similar tax saving products like tax saving Fixed deposits though both have tenure of five years.
So if you do not have funds now, you can temporarily borrow from your friends or relatives and buy NSCs to the extent of unutilized portion of the deduction available under Section 80 C to avail the tax benefits. On realisation of the money, the post office will issue you a passbook for the NSC. The practice of issuing physical certificate is discontinued.
Once you get the past book, you can approach any schedules bank, co-operative bank or co-operative credit society to grant you a loan against security of your NSC as evidenced by the passbook. The bank will disburse the loan, once it receives the passbook with lien marked on it. With this money you can repay the money borrowed for investing in NSCs.
There are two options with regard to availing loan against NSCs. Either you can take a lump sum loan and repay in equated monthly instalments or you can obtain an overdraft facility against security of NSC. So in case you feel your cash flow is erratic, taking an overdraft account lets you have the flexibility to use the funds as and when needed. However, if you feel that you can pay certain sum of money every month, taking a lump sum loan against NSC is advisable. The banks normally grant loan up to 80% to 85% of the face value of the NSC. The rate of interest charged on the such loans is very competitive and the rate is substantially lower than the rate charged on personal loans. The interest rate varies from bank to bank and is normally 1% to 2% higher than the interest rate on underlying NSC. You may have to pay one-time processing charges also which is around @ 1% of the amount sanctioned. Generally there are no prepayment charges on loan taken against NSC.
Recycling your ELSS
Your ELSS investment which has already completed the mandatory holding period of three years offers you an excellent opportunity to avail income tax benefits without actually having to put any extra money out of your pocket. There is no exit load on redemption of ELSS, which is allowed only after three years. The long term capital gains (LTCG) on all equity products subjected to Security Transaction Tax (STT) are exempt up to one lakh and beyond that you have to pay tax at flat rate of 10%. So what you have to do is to redeem the existing units of ELSS and invest in the same scheme in case you do not wish to exit out of the investment for any reason and avail the tax benefits under Section 80 C.
This strategy of simultaneous purchase and redemption will ensures that you are able to avail the tax benefits without investing any further amount and that too without having to take the risk of timing the market as redemption and purchase is made at the same Net Asset Value (NAV).
This tax rebate comes at a very nominal costs. The fund houses charge STT @ 0.01% of the redemption value. Since there are neither any entry load nor any exit load you can buy and redeem the units at the price if both the transactions are affected on the same day as same NAV will apply for purchase as well as for redemption. You may have to temporarily arrange some funds if you wish to do both the transactions at the same NAV else the reinvestment can be made after the redemption proceeds get credited in the bank.
So your existing ELSS and fresh investing in NSC can help you tide over your temporary cash crunch and let you avail tax benefits at the same time. Please do not resort to these in case you are not feeling the credit crunch.
The writer is a tax and investment expert and can be reached at [email protected] and twitter on @jainbalwant
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