Don’t ever ignore the opportunity to (legally) save on taxes just because it is cumbersome. The less tax you pay, the more disposable income in your hands to either spend or invest.
Unfortunately, for many, tax saving is nothing more than an end-of-the-financial-year strategy cobbled together in a tacky fashion. What they fail to comprehend is that should they play it smart, you could give your portfolio a fillip.
Take a holistic view.
In the drive to enhance your deductions, don’t forget to factor in the entire portfolio. Which means, every single decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion.
Most individuals rarely think about tax planning from an investment point of view. Hence, they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up any product that offers a tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.
Always bear in mind that tax planning investments are no different from conventional investments. Which makes it imperative to obtain an in-depth understanding of all investment avenues that offer tax benefits and choose the ones relevant to your situation.
In a crazy dash to meet their Section 80C requirement, most investors opt for unit linked insurance plans (ULIPs) and endowment plans, and often end up with products that are duplicated in their portfolio or do not suit their need. Life insurance should never be bought with the intention of saving tax. Tax saving is just one of the benefits that come along with it. The main benefit is the provision of finances in the case of death of the policy holder.
Don’t limit tax saving to just fixed-return instruments.
Individuals tend to look at the Senior Citizen Savings Scheme (SCSS), 5-year deposits, National Savings Certificate (NSC), and Public Provident (PPF) as the tax-saving investment avenues. But you can also invest in an Equity Linked Savings Scheme (ELSS) which is a diversified equity mutual fund that offers a tax benefit under Section 80C. It also has the lowest lock-in period of just three years.
An ELSS is all the more apt if your current portfolio is heavily tilted towards fixed income and debt. If the bulk of your savings is in EPF, PPF and fixed deposits, it would not be wise to opt for, say, an investment in NSC to save tax. Instead, thinking along the lines of an ELSS is more logical. As on December 31, 2017, the ELSS category average stood at an annualised 3-year return of 14.09%, while the top five funds delivered annualized returns ranging from 17% to 19%.
It is easy to point out instantly that the returns of such funds are the highest in the tax-saving category when compared to other options. But one must bear in mind that these are equity funds which means that the return is far from guaranteed. So pick a well-managed fund with a consistent track record and stick with it over the long haul. Don’t be in a tearing hurry to sell your fund units on completion of three years. Exit from the fund when the market is rallying so you walk away with a profit. If this means hanging on for a few more years, do so.
Look at the big picture.
Tax saving is more than just investments.
Under Section 80C, you can show your child’s education fees to avail of a deduction. Ditto with the principal repayment of a home loan.
When deciding how much to invest under Section 80C, first take into account children’s tuition fees, principal repayment on home loan, contribution to Employees Provident Fund (EPF), and any life insurance premium you are already paying. In the case of the latter, the deduction is valid only if the premium is less than 10% of the sum assured. Investments in the Sukanya Samriddhi scheme also fall under the Section 80C limit.
If, after the above, you have not already maxed the Rs 1.50 lakh limit, then you can look at the investment options available, such as PPF, NSC and ELSS. However, even if you have maxed your limit but hold a PPF account, then deposit at least the minimum to keep the PPF account running.
Go beyond Section 80C too. Paying of premium on a medical insurance policy for yourself and dependents, servicing of an education loan, interest payments on home loans, a donation to a recognized charity, all qualify for deductions.
In closing, we reiterate out view. Don’t view tax planning in isolation. It must be done in conjunction with your overall portfolio.
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