Time to make taxsaving declaration
Ensure that there is complete documentation of your investments. Don’t buy any product in a hurry
Ensure that there is complete documentation of your investments. Don’t buy any product in a hurry.
At the start of the financial year, employees declare their intention to make investments or save in instruments that would give them tax benefits. Based on this declaration, the company pays the monthly salary, taking those deductions into account. This is the time of the year when the human resource department will seek all the documentation of these promised investments. And, if you haven’t made those investments, get ready for significant salary cuts in the last quarter of the financial year (January-March). However, don’t buy any product in haste. First, start calculating the numbers:
Check the investments you already have: Section 80C allows deductions on a number of categories, some of which you may be already investing in: Life insurance premiums, children’s tuition, contributions to Employees’ Provident Fund (EPF), and principal repaid on home loan. Only if there is any headroom left (the ceiling for Section 80C deduction is ~1.5 lakh) do you need to invest more.
Are you adequately covered? First, see whether you have adequate life insurance. Ten times your income is one thumb rule you may use. If you don’t, buy term insurance to cover any shortfall in coverage. To choose the insurer, take into consideration factors like claim settlement history, premium rate, solvency ratio, and time taken to settle claims.
Asset allocation: Next, look at the asset allocation of your existing investments. "If your existing investments are skewed towards debt, invest for tax saving in an equity-oriented product, and vice versa," says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). Salaried employees, for instance, make contributions to EPF (8.65 per cent current return), and hence their investments may have a tilt towards debt. They may balance this with investment in an Equity Linked Savings Scheme (ELSS) fund or retirement schemes of mutual funds, which are also entitled to Section 80C benefit. A self-employed person, who has begun investing in equities may, in the absence of the option to invest in EPF, find Public Provident Fund (PPF) attractive.
Buy health insurance: The premium you pay on mediclaim and critical illness policies is also entitled for deduction under Section 80D. Says Archit Gupta, founder and CEO, ClearTax: “A deduction of ~25,000 is available for individuals who pay a medical insurance premium on cover for self, spouse or dependent children. If an individual is more than 60 years old he can claim a deduction of up to ~30,000. A further deduction is available for a mediclaim policy purchased for parents.” In that case, there are deductions of ~30,000 if the parents are senior citizens and ~25,000 if they are not. So the maximum deduction available for mediclaim and critical illness policy purchased by an individual is ~60,000. The amount of health cover you buy should be dictated not just by the amount of tax benefit available, but by your health care needs.
Use NPS if it suits you: An additional deduction of ~50,000 is available under Section 80CCD(1B) for investment in the National Pension System (NPS). Weigh its pros and cons before investing. “NPS is a forced retirement saving product. The money is available to you only at the time of retirement. Invest in it if you are comfortable with this condition. If you withdraw prior to retirement, 80 per cent of the corpus will be annuitised, in which case you may get only a small amount in your hand,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. What to avoid? If you leave your taxrelated investments for the last moment, you may end up investing in the wrong products. Avoid the ones that force you to commit a large amount, which may be beyond your capacity, on an ongoing basis. In PPF, though you have to contribute for 15 years, you can keep the account alive by contributing a meagre ~500 per year. In an investment-cum-insurance policy, you may be required to contribute a high amount each year which may be beyond your ability. “Traditional plans acquire a surrender value only after you have paid the premium for three years. If you stop earlier, you lose all the money,” says Raghaw.
Adds Kuldip Kumar, partner and leader-personal tax at PwC India: “Many people are not aware that the tax benefit, if claimed earlier, gets reversed if you don't pay premium for at least two years in a traditional policy like endowment and moneyback and for at least five years in a unit-linked insurance plan (Ulip).” In case of Ulips, if you surrender the policy, the money goes into a discontinuance fund where it earns four per cent and you can withdraw after five years. In ideal circumstances, your tax planning should start at the beginning of the financial year, and not later in the year. “If you are investing in an equity-linked saving scheme (ELSS) or retirement fund (which are also entitled to Section 80C benefit), you will get the benefit of rupee-cost averaging. If you are investing in a fixed-income product like PPF or five-year tax-saving fixed deposit (FDs), you will start earning a higher rate of interest from the beginning of the year, instead of the 3.5-6 per cent in a savings account,” says Dhawan. PPF currently offers 7.8 per cent, while the best rates on five-year tax-saver FDs are around seven per cent.
Of course, you can make your life much easier by making tax-saving investments from the start of the year. This will allow you to save regularly, which is easier. Leaving it entirely for the end of the year could lead to a cash crunch. Those who invest for tax saving at the end of the year also tend to make mistakes in the selection of both the product category and the product. They could be mis-sold a traditional insurance plan where the premium may be high, cover may be inadequate, and return may be low. Sometimes, people get the product category right but the product wrong. When buying an ELSS, they may invest in the wrong fund because they don’t have the time to do proper research. Finally, ensure that your tax-saving investments are in sync with your financial goals.