This festive season, think beyond the usual while gifting your near and dear ones, and explore financial products. The value of such gifts will last much longer than gifts like crackers, clothes or sweets.

But, financial products as gifts cannot just be picked off the shelf. Certified financial planner (CFP), Arnav Pandya says: “You need to match a financial product’s maturity period and returns with the requirements of those you want to gift these to. So, take into account their employment status and the tax bracket they belong to.” Avoid cash gifts, since there are tax implications for amounts above Rs 50,000 and restrictions on relatives who can be gifted. Even without cash gifts, remember, any income accrued to non-working spouse and children below 18 years, will be considered as income earned and clubbed with the main tax payer’s income.

Debt products which beat equity are a good option. Last November, the Bombay Stock Exchange’s Sensex crossed 21,000 and the National Stock Exchange’s Nifty touched 6,338. Since then, both have come down 19 %, but average returns from debt funds and even fixed deposits have stood at nine %, due to the high interest-rate regime.

PARENTS:
While gifting parents or senior citizens, safety of capital and a regular income become the criteria for choosing investment options. While the Senior Citizens Savings Schemes (SCSS) offers around 9 % return, most banks offer around 10 -10.5 % on their fixed deposits (FDs).

With a tax exemption of up to Rs 2.5 lakh, senior citizens in the lower tax bracket will benefit from investing in either of these. But, for those in the highest tax bracket (30 %), the post- tax returns work out to 7 % plus. However, at 8 % returns, the Post Office Monthly Income Schemes (POMIS) are only for those in the lower tax bracket. Post tax returns will only give out around six to seven percent. Of course, in terms of regular income, POMIS offers monthly incomes, while payouts from FDs is on a quarterly basis.

But, if one’s parents are still employed, tax efficiency may be important rather than regular income. Those in the higher tax bracket could look at debt funds. If the investor holds on to the growth option debt fund for over a year, profits accrued on it are considered as long term capital gains (LTCGs). So, one can claim 10 % without indexation, or 20 % with indexation benefits on them.

If one chooses funds with dividend option, the fund has to pay a dividend distribution tax of 14.163 %. Liquid and money market funds pay a dividend distribution tax of 28.325 %.

SPOUSE:
Opt for products with lower tax incidence if your spouse is employed Those not needing the money immediately could look at debt funds with growth options, to get long term indexation benefits. Under indexation, investors can discount the average inflation for the year.

Those in the higher tax brackets, could invest in Fixed maturity plans (FMPs). These invest in debt securities, that mature just before the scheme’s maturity and offer post-tax returns of 8.5-9 %. FMPs with over a year duration are popular because of the possible double indexation benefits. For instance, if an investment is made in November 2011, one can claim indexation benefits for both financial years 2011-12 and 2012-13, as the product will mature in 2012. With inflation at around 9 %, a double indexation benefit (of 18 %) would make the investment tax free.

However, this could change if the Direct Tax Code (DTC) comes into effect from 2012. “If one wants to avoid the uncertainties of DTC, one could look at short term FMPs. He can reinvest the funds taking into account the interest scenario then,” says financial advisor, Suresh Sadagopan.

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Also, FMPs may or may not declare dividends, so these aren’t for those wanting to gift regular incomes to their spouses. They could look at open-end short term income funds for a period of six months. “It would offer ease of liquidity. Given that interest rates are at their peak right now, the risk of initial capital getting reduced is low at this point,” says Rahul Pal, head-fixed income, Taurus Mutual Fund.

CHILDREN:
While investing for your children, if you have time on your side, you could opt for instruments with longer tenures. This will allow even small amounts to grow into a sizable corpus. One could go for tax free bonds offered by Hudco and IRFC. These bonds have a 10- 15 year maturity period and offer an average annual 7.5 – 7.8 % rate of interest. “Pre-tax yields on these bonds are close to 11 %. Also, both the coupon (the interest earned) and the principal at maturity is tax free, making it a completely tax free instrument for the investor,” adds Pal.

The other option is public provident fund (PPF). However, you need to limit it to Rs 70,000, if the investment is on behalf of your minor child. Yet, at eight % compounded annual returns, it also offers tax relief under Section 80 C in the investment year. Moreover,they are tax free even on maturity, after 15 years.

Source: Business-Standard