Within the next month or so, salaried employees will be asked for Tax proof of investments. In case you haven’t made any investment however, there’s still some time left on your bucket. It’s much better to act ahead of this deadline as one tends to make mistakes when undertaking tasks in a rush at the very last moment. Here are the Do’s and Don’ts we should watch while making your tax saving investments this season.
Don’t switch funds every year
While your tax saving investments are meant to help you save tax, you should also use them to build wealth. Please keep in mind that tax planning or saving is not a goal itself, it’s a part of financial planning that can be achieved along with while creating wealth. Often, when lock-in period on tax saving investments ends, people take out the money and re- invest in the same or other tax saving instruments. Instead of routing the same money, if you let the money stay invested, especially in an instrument like Equity linked saving scheme (ELSS) and put in fresh money every year, you will be able to build large-corpus over a longer period.
However, you can start investing in small installments at the beginning of the year with Systematic investment plan in ELSS funds that would prevent you last minute hassle towards the march end.
Examine your Need First
Before you make a tax saving investment, then check what financial plan say in your portfolio. Assess your insurance policy need, if you need more term cover, or if you require personal health cover, purchase this item first, then proceed to investment product.
Likewise assess the debt and equity allocation on your Portfolio prior to investing. If your portfolio is weighted heavily in favour of equity, then invest incremental amount in debt, and vice- versa.
On the equity side, ELSS is a good option. On the debt side, PPF is an attractive option. National pension system is a good hybrid product that you can invest in to get Rs 50,000 tax deduction under sec 80 CCD(1B)
Don’t treat all the Tax saver products as equal
Not all the tax saving product are equally good. Some are EEE (Tax exempted at all the three stages) while others are not. Public provident fund (PPF) gets EEE benefits. But the the interest income from tax saving fixed deposit or NSS (national saving scheme) is taxable.
Additionally, you should look at the risk perspective of the tax saving instruments, if you are short term investor or cannot lock the money for long term then ELSS having the shortest lock in period of 3 years but can give you better return if you stayed invested even after lockin period ends. Equity historically has given more than 12% returns if you could continue with it for at least 15 years.
However, if your portfolio weighted heavily on equity side then some allocation could be align with PPF.
We have a separate blog post on ELSS vs PPF
Avoid combination product
When making tax saving investments, it’s far better to purchase standalone products, which serve one purpose, say insurance (such as term plan) or investment (such as ELSS). It’s ideal to keep investment and insurance apart. Avoid combination or mixed product like conventional insurance. For the premium that you pay, you may not get adequate insurance coverage as well as the returns from these products tends to be low.
Don’t over invest
Remember that section 80c has a limit of 1,50,000. A salary employee would already be contributing to his employer provident fund. Most of us also have life insurance plans whose premiums are also eligible for tax deduction. If you have a home loan, the principal part of the EMI also eligible for tax deduction under sec 80c. Even your children tuition fee qualifies. Add up all these and see how much of the section 80c is exhausted already. Invest only for the balance amount that is pending to complete the eligible limit under sec 80c i.e 1.5 lakhs. All tax saving investment comes with lock-in period, then why lock-in more money than you absolutely need to?