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By the time you read this, you may still be struggling to find right investment opportunity to save tax by utilising tax benefits available under the Income Tax Act. Many of us keep postponing the mandatory investments for saving tax to the last minute. However, a little planning can not only save us from last minute delays and mistakes, but also help in identifying the most efficient solution.
The major tax benefit for individuals to save tax is in the form of Sec 80C investments. Amount invested up to Rs1 lakh can be claimed as a deduction from total income of the individual. Besides this, there is an additional limit of Rs 20,000 available exclusively for infrastructure bonds under Sec 80CCF.The range of investments can be broadly classified in four different heads – fixed income, insurance, mutual funds and infrastructure bonds.
TAX SAVING OPTION
One can buy a pure term cover which not only insures the individual for a far higher amount but also gives you tax benefit. ULIPs on the other hand provide life cover and also invest a substantial portion in market-linked investments. After the regulatory changes, ULIPs now have become quite efficient by having much lesser charges. Insurance investments have the benefit of EEE (Exempt Exempt Exempt) criteria.
FIXED INCOME PRODUCTS
For salaried individuals, a good part of savings is done through mandatory PF deductions. The Public provident scheme, which is discretionary, is an excellent option to invest as it follows an EEE structure, the interest being tax free.
EQUITY
Under this, only equity linked saving schemes of various mutual funds are allowed. They provide an excellent mode for wealth creation for small investors who have a little higher risk appetite
Let us now discuss some of the most common mistakes that people do because they have not thought enough or are making their tax saving investments in a hurry.
Many times, because of last minute decisions, individuals realise that they do not have sufficient money to actually make a Rs1 lakh investment. This lack of planning, not only results in lesser savings but also lesser income because of higher tax outgo. A simple trick of distributing the tax savings investment over the 12-month period can avoid these blues.
Many of us look at Sec 80C investments as a burden and do not pay enough attention. On the contrary, one should look them as a great “economic” motivation to save and invest more.
A very common mistake is making investments that are at cross-purposes to the age and risk profile. For example, Sachin is just 26-years-old; unmarried; and having no family responsibility. He invested the entire Rs 1 lakh in a traditional insurance plan, which is giving him miniscule life cover. Maybe, a ULIP or an ELSS may have been more suitable for his age profile. This way he could have earned better return in the long term.
In their haste to invest at the last minute, most investors do not look at the underlying cost of insurance products. A few questions if posed to the advisor, can ensure that the policy chosen is cost efficient. Another common mistake is the inability to differentiate the performance of different products of the same basket. For instance, if one has decided to invest in ELSS schemes, the next step is to find out which is the best ELSS scheme at that point in time.
Last but not the least, one should keep track of how much 80C investment has already been done. Richa had a PF deduction Rs 50,000 during the last year. However, not realising that it was an eligible investment under 80C, she still went ahead and committed Rs 1 lakh towards an insurance policy. Or take the case of Tewari, who buys an insurance policy every year while the old policies are still active.
(The writer is Managing Director, Ladderup Wealth Management.)
