Are you facing a cash flow crisis but need to invest to save taxes? Loan against NSC, ELSS recycling


The last month of the year is very difficult for taxpayers in terms of cash flow due to the obligation to make investments for tax purposes with the threat of a tax hike looming on the horizon. But you have a solution in hand in case you have any Equity Linked Saving Scheme (ELSS) investments that are out of the lock-in period, even if you are facing a cash flow crisis. Likewise if you don’t have one ELSS investment to recycle, you can take shelter under National Savings Certificates (NSCs) to alleviate your cash flow crisis. Let us discuss how to do this.

Loan against NSC

In case you don’t want to take the risk associated with equity and interest rates, NSC is ideal for you. Currently, NSCs have a term of five years. The current interest rate on NSC is 6.80% compounded semi-annually. The interest rate is fixed for the entire term of office unlike the PPF account where the interest rate is subject to change every quarter and which also applies to investments already made in the past.

The best part about NSC is that you can get loans from banks. This facility is not available for similar tax saving products like fixed rate deposits, although both have terms of five years.

So if you don’t have funds now, you can temporarily borrow from your friends or relatives and buy NSC to the extent of the unused portion of the deduction available under section 80 C for tax benefits. When carrying money, the post office will issue you with a passbook for the NSC. The practice of issuing a physical certificate is abandoned.

Once you have obtained the last book, you can go to any timetable bank, cooperative bank or cooperative credit society to provide you with a loan against your guarantee. NSC as evidenced by the booklet. The bank will disburse the loan, once it receives the passbook with a lien marked on it. With this money, you can repay the money borrowed to invest in NSCs.

There are two options when it comes to using loans against CSNs. Either you can take out a lump sum loan and repay in equivalent monthly installments, or you can get an overdraft facility against NSC’s guarantee. So, in case you feel your cash flow is irregular, taking an overdraft account allows you to have the flexibility to use the funds when needed. However, if you think you can pay a certain amount of money each month, it is advisable to take out a lump sum loan against NSC. Banks normally provide loans of up to 80% to 85% of the face value of the NSC. The interest rate charged on these loans is very competitive and the rate is significantly 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 of the underlying NSC. You may also need to pay a one-time processing fee, which is around @ 1% of the sanctioned amount. In general, there are no prepayment charges on loans taken out against NSC.

Recycle your ELSS

Your ELSS investment which has already completed the mandatory three-year holding period offers you a great opportunity to enjoy tax benefits without having to put extra money out of your pocket. There is no exit charge when redeeming ELSS, which is only authorized after three years. Long-term capital gains (LTCG) on all stock products subject to Security Transaction Tax (STT) are exempt up to one lakh and beyond you must pay a flat tax of 10%. So what you need to do is to buy back the existing shares of ELSS and invest in the same system in case you don’t want to quit the investment for some reason and enjoy the tax benefits under Article 80. vs.

This simultaneous buy and redemption strategy will ensure that you can enjoy the tax benefits without investing any additional amount and that too without having to take the risk of timing the market as the redemption and purchase are made at the same net asset value ( NAV).

This tax rebate comes at a very minimal cost. The houses in the fund charge STT at 0.01% of the redemption value. Since there is neither an entry nor an exit charge, you can buy and redeem units at price if both transactions are affected on the same day, as the same net asset value will apply to both purchase and purchase. redemption. You may need to temporarily arrange some funds if you want to complete both transactions at the same NAV, otherwise the reinvestment may be made after the redemption proceeds are credited to the bank.

So your existing ELSS and your new investments in NSC can help you overcome your temporary cash flow crisis and allow you to enjoy tax benefits at the same time. Please do not resort to it in case you do not feel 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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