You can make your maddening February a very sane one. The key is to understand how tax-saving investments could fit into the big picture of your finances and adopt approaches that will help you choose the right tax-saving investments.
Link tax saving investments to long term goal: "Like all other investments, tax-saving investments too need to be linked to your goals," says Lovaii Navlakhi, a Bengaluru-based financial planner. Given the fact that tax-saving investments are mostly long-term investment products with lock-in periods of various lengths, it makes sense to earmark them for long term goals such as kids' future and your own retirement.
This means other goals such as car and home acquisitions require other investments. "Debt options qualifying for Section 80C such as 5 year bank or post-office fixed deposits could help in such cases," says Gaurav Mashruwala, a Mumbai-based financial planner.
Choose on the basis of post-tax returns. The next equally important selection criterion is the post-tax return of tax-saving investments you choose. For instance, the National Savings Certificate (NSC) provides you with Section 80C benefits but its returns, currently 8 per cent annually, is taxable. This makes its effective post tax return 5.53 per cent.
Tax saving strategies during your lifetime
Early years: When you start working, the savings for tax-saving investments might be all your savings as expenses are in hot pursuit of your income. Like the rest of your working life, during this period too, your provident fund savings will by default take up some portion of the total Section 80C deduction.
Start with PPF: During this period, it is important to start your tax-saving investments with a public provident fundaccount.
Given its safety -- it's government backed -- with relatively high returns, currently 8 per cent per annum, and tax exemptions on its interest earnings and the final corpus, its effective post-tax return currently works out to above 11.57 per cent (for someone paying 30.9 per cent tax). Given its Rs 500 per year minimum investment stipulation, with one contribution allowed every month, you can even invest small amounts for your long-term.
Get the ELSS growth kicker: During this stage of your life, since you are likely to be without major responsibilities or liabilities, you are in a position to take investment risk such as those involved in equity mutual funds. This is why many financial experts recommend that you invest in equity linked savings schemes of mutual funds.
With ELSS, you can channelise even small amounts of investments, amounts as less as Rs 1,000 every month in equity mutual funds through systematic investment plans. For less financially literate people who struggle to save regularly and would prefer to rely on investment products of insurance companies, the option of investing in highest equity exposure variant of unit linked insurance plans (Ulips) exists. You can opt for a pension plan to augment your PF investments.
When you get married. . . : By the time you are married, your income would have gone up further and your provident fund deduction would have gone up too. This will leave you with lesser elbow room with Section 80C investments. After mandatory PF deductions, the first charge on Section 80C investments from now on would be of life insurance premium payments.
"Your life cover shouldn't depend on the tax exemptions you get," points out Navlakhi. You need adequate life cover, whether you get tax breaks or not. Experts like him argue that since life insurance purchases were motivated by tax savings, people remained underinsured.
One way of having your cake and eating it too would be to take low-premium, high cover term insurance plans. These will still leave you with adequate portion of Section 80C entitlements even after PF deductions.
After term insurance, you can continue with your PPF and ELSS investments. If possible increase them to exhaust the Section 80C limit. In case of a double income household, ensure most of the tax saving investments is from the income in the higher tax slab. If both the incomes are in the highest tax slab, risk taking capability is higher. This means that such a couple needs to invest more in ELSS, besides both investing in PPF.
. . . and have kids: By the time you have kids, the PF deduction would have gone up further with the rise in income. "Beyond an annual income of Rs 5-6 lakh, there isn't too much you can do in terms of tax-saving investments," says Mashruwala.
While the life cover through term plans needs to go up, in case of a double income family, lives of both the spouses should be covered since there are dependent kids. While you need to continue with your PPF and ELSS contributions, you could also claim Section 80C benefits for contributions to kids' PPF accounts (each parent can claim up to a combined limit of Rs 70,000 of tax deduction for contributions to their individual and kids accounts).
But none can have more then one account in his/her name. Contributions to kids' PPF account really helps if you still have some distance to go before the Rs 1 lakh limit. But the chances are that by the time you have kids, you have a host of items that qualify for Section 80C and these add up to more than Rs 1 lakh.
Two major additional items at this stage typically qualifying for deductions would be principal repayment of home loans and tuition expenses of kids. Regardless, of whether you claim these expenses or not you will need to continue, and ideally increase your previous investments in term plans, PPF and ELSS. If ELSS investments don't qualify for Section 80C benefits due to exhaustion of the limit, you could concentrate more on top performing open-ended diversified equity funds.
Nearing retirement: As you near retirement, you would like to invest in options without lock-ins. "It is better to keep investing in existing investments such as PPF and claim tax benefits for expenses such as kids' tuition expenses and principal repayment of home loans," says Veer Sardesai, a Pune-based financial planner.
There is one more option still. "You could increase the contribution to your PF since you will be getting the money shortly and give further impetus to the compounding effect," says Gautam Nayak, a Mumbai-based tax expert.
In retirement: When you are retired, your Section 80C obligations might not be much. Here, you can opt for Senior Citizens' Savings Schemes (SCSS) recently made eligible for tax deduction and which provides regular income through a return of 9 per cent on the invested amount (upper limit: Rs 15 lakh).
The key is to ensure that your investments in income producing investments are not more than your expenses since they won't help you combat inflation. There is one more tax-saving option. "You continue investing in PPF even as you make partial withdrawals from it to get tax-free income," suggests Nayak.
In the course of time, rising incomes, lowering tax rates and plugging tax exemptions has meant limited latitude to individuals to save on taxes. But as we have shown there is still enough room and enough ways by which tax-saving investments could become a part of your larger financial gameplan.
