Tax Saving u/s 80C – Is it only saving or an investment too??
On 30th March 2016 I went with a friend to an insurance company’s office to help him resolve his query. There I saw a gentleman (educated / professional / working for a corporate in Gurgaon) asking the customer care lady to give him any insurance plan which she feels is good so that he can submit the proof to his employer for investment in tax saving instrument – only condition was that he should get the proof immediately.
Have you ever acted like the above mentioned gentleman and invested randomly in any tax-saving instrument? Or consulted your relatives and colleagues for any recommendations for saving tax and then later blamed somebody else for your poor decision – making?
If you have done anything which is mentioned above without understanding the pros and cons of each product such as liquidity, tax efficiency, return, risk, your risk profile then needless to say you have acted like a fool.
Section 80C – U/s 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF by investing in following instruments: PPF, EPF, VPF, NSC, FDs, Life Insurance (Term, Annuity, ULIPs), NPS, ELSS, Sukanya Samriddhi.
Choosing a tax-saving instrument must take into account your long term objectives and risk appetite. Your risk appetite can be determined by your age and financial situation. To better understand this, let us look at three different scenarios.
1.If you are a young investor (28-45 years), ELSS is ideal for you. This is because you have a high risk appetite as well as the time to tide over market volatilities before retirement kicks in. Wealth creation, over period of time, is much higher in ELSS as compared to other investment options. NPS is not recommended because 40% of the corpus will have to be used to purchase pension annuity.
2.If you are a professional in late 40’s and early 50’s, the choice to invest in an instrument will be determined by your current portfolio. Thus, it is the time to revisit the asset allocation and see if your portfolio is 60-65% in equity and rest in debt or not. If you are debt skewed, you should surely go for ELSS and vice versa, one can look at other risk free products.
3.For senior citizens it is generally recommended that they should opt for debt products such as PPF, NSC, etc. for their annual tax savings. But in our opinion, if a senior citizen already has 80-100% of his portfolio in debt and has a considerable current income/pension to support his living then he/she may look at the available equity options to park some of the deductible limits in.
The benefits of tax saving are very high. Smart tax planning will not only help you to save tax but will also lead to capital appreciation overtime. Most of you think that it is just one thing that you have to do every year for the sake of it and this is where you act foolishly. However, an efficient and smart tax planning can save you up to Rs. 46,350 every year.
Keep in mind that the purpose of investing in 80C instruments shouldn’t be just to save tax for the current year but to grow your wealth by investing in better instruments as well. Stop waking up in the last month of the year to save tax and taking hasty decisions. It is always better to invest throughout the year so that your investments get more time to reap the long term benefits.