DON’T TAX YOURSELF OVER TAX SAVING
There is no need to go overboard on tax-saving investments. Assess your portfolio before committing more funds to expensive instruments with low returns
The joy of the new year celebrations is usually short-lived, especially for salaried individuals as the investment declaration sheet from the accounts department hits the inbox in the first week of January.
But in a hurry to invest before the deadline, often basic investment parameters like risk, returns, time horizon and need are ignored and the easiest option availed of. However, before you grab the first tempting investment offer coming your way, do remember a few essentials.
DON’T OVERDO THE TAX PLANNING
Take a deep breath and reflect on whether you are being overly anxious about tax planning. “Tax saving investments aren’t considered a part of overall investing. Hence, people forget to take into account schemes they are already invested in for various goals which meet the Section 80 C requirement. For instance, PPF or child’s education or insurance premiums for risk mitigation. As a result, they end up investing much more than required for tax saving,” explains Hemant Rustagi, CEO, Wiseinvest Advisors.
Going in for new tax saving investments in a hurry is a poor means of achieving your financial goals. “Investors tend to make the mistake of overdoing tax saving investments,” says Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management. What is important is assessing whether you really need to invest to save taxes. Though the limit to save tax under Section 80 C is Rs 1.5 lakh, you do not need to commit that high an amount at the fag end of the financial year.
ASSESS THE NEED
Firstly, deduct expenses or mandatory investments that have already been made during the year. These would include your child’s education fees, home loan principal repayment and even your employee provident fund (EPF). For this, you just need to check three documents to know the answer—salary slip, school fee receipts and the loan account statement or amortisation schedule.
BUILD AROUND GOALS
Once you have found the balance amount needed to be invested, don’t just randomly invest. “Make investments based on your overall goals, such as child’s education, retirement. This will help you place the investments in the right time horizon, even as you meet your tax-saving requirements,” Rustagi suggests.
This will help you avoid tax saving options that are irrelevant to your financial goals. Opting for health insurance, for instance, which offers a maximum deduction of Rs 75,000 (if senior citizen parents are included), should be based on the need for the insurance. If one takes a larger cover than required, you could save a maximum of Rs 23,400 in taxes if you use the entire limit. But chances are you will be spending nearly the same amount
while paying premium for a cover that wasn’t needed in the first place. Therefore, when it comes to saving tax through Sec 80D, it’s better to prioritise—do you already have adequate, quality health insurance; is this new plan only motivated by its tax saving potential? Remember, tax saving is a secondary outcome, the primary objective here is having a good health cover.
UNDERSTAND COMMITMENT
Don’t forget to gauge future commitments to investments. Take the case of Pushanta Das, a mid-level manager in Kolkata, who has been investing Rs 42,560 each year in a Ulip since 2011. He soon realised that he didn’t need to invest that high an amount in future years for tax saving. But when he stopped paying the premium in 2017, his policy was reissued at a higher NAV using the invested funds, causing losses.
Similarly, home loan is a commitment to pay EMIs for 10-20 years and shouldn’t be taken up purely for tax deduction unless there is a need to raise this capital-heavy asset for personal use. It would not be advisable to take a home loan just because it offers tax advantage—a home should be bought based only on the needs of your family. The tax saving is a secondary aspect.
PLAN IN ADVANCE
Even when there is some tax saving investment scope left within the section 80C limit, instead of waiting till January, one should initiate tax saving investments around the beginning of the financial year. By planning early, you will know what you don’t need to do and safely avoid investing in wrong instruments and overdoing tax-saving investments.
It is better to give yourself time to understand and do your own fact- finding about the tax saving product being offered to you. “Nearly
50 per cent of Ulip plans are sold between January and March as insurers capitalise on the rush to invest. This is despite the fact that the 10year returns on Ulips have been 5.6 per cent, which is lower than the returns of other tax-saving instruments,” Azeez points out.
Having a long term and effective approach to tax planning is essential for sound investments. “Plan your tax-saving investments for the next five years and avoid rediscovering the wheel every year, especially with regard to Section 80C,” says Azeez. He even suggests that one identify the year in which tax-saving investments wouldn’t be needed at all. This is because your mandatory PPF, home loan principal repayment, and term insurance plan itself would exhaust your Section 80C limit of Rs 1.5 lakh.
PICK RIGHT
Always peg your investment decision based on the ability of the option to fulfil your investment objectives and make post-tax returns. Even if an avenue weighs low on tax deduction but the post-tax returns are stellar, then it should find a place in your portfolio, even if it doesn’t have the taxsaving tag. “Tax saving is a byproduct of investment,” says Azeez.
ELSS funds have given 17.5 per cent annualised returns in the past 15 years ended December 31, 2018, as against 8 per cent offered by a traditional fixed income product like the PPF. When pegged against inflation, that reigned at 7 per cent (consumer price index or CPI-based), which means one has a better edge with ELSS than other debt options. Even with the 10 per cent long-term capital gains tax applicable on gains in ELSS exceeding Rs 1 lakh, one would be earning a better post-tax return compared with other debt-heavy options, which also have a higher lock-in period. —Khyati Dharamsi (The author is a Mumbai-based freelance writer)