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It's not just about tax

Learn why it is important for you to start your tax-saving investments in the first quarter of the year

It's not just about tax

I'm quite tired of February being considered the tax-planning time of the year. Even though it is so in terms of actual investor behaviour, that's wrong. The real tax-planning time of the year is April. If we don't start planning and executing our tax saving in April, then we may get too late. In fact, I've seen over the years (including in my own conduct a few times) that when we don't start tax-saving investments in the first quarter of the year, it's often postponed till February or March, sometimes literally 31st March. Therefore, let's all resolve that we will all put our investment foot forward right from April 1, 2019 onwards, rather than just playing catch-up for the remaining few days till March 31, 2020.

One of the ill-effects of doing this last minute catch-up is that we forget that tax-saving investments are investments first. What I mean is that the tax-saving part gets all the focus while the investment part does not. This leads to bad choices which are made on grounds of convenience, rather than real suitability. For example, almost all banks have websites and apps from which it is relatively easy to make the five-year tax-saving fixed deposits. In comparison, most mutual funds still have half-hearted attempts at providing direct online investing. For example, just this past month, I saw a colleague try direct ELSS investments on five different AMC websites and eventually end up investing in the only one that worked well. If he was less determined about investing in mutual funds only, he could have made a tax-saving bank deposit through the bank app on his phone.

It is a fact that some of the worst investment decisions that individuals take are with their tax-saving investments. They choose deposits with long lock-ins that hardly pay anything more than inflation; they buy insurance schemes that eat away most gains in agent commissions; even with ELSS funds, they choose with scant regard to performance track records.

Why does this happen? The basic reason is that there is a confusion of goals between saving tax and making investments. Since the typical saver makes this decision either in late March under the duress of having the deadline slip by or under intense selling by a salesman. At the end of the day, people make bad investment decisions and if they ever realise it, they console themselves by saying that at least they got tax benefits.

Eliminating this time pressure is simple and facilitates a careful approach. These investments are investments and should not be made if you would not make them otherwise. For example, if you otherwise do not need to make a fixed deposit but would rather invest in equity, then do so with your tax-saving investments as well. Or the opposite, if the need be. Any investment has to first make sense as an investment, and only incidentally be a tax-saver.

For example, as we have often written that when you look at the returns and liquidity issues, the Public Provident Fund makes very little sense compared to ELSS funds. If you construct a 15-year scenario, you can see this clearly. However, far too many Indian savers go through this annual PPF ritual.

So, I always recommend: gather all the information, consider all the facts and then choose your tax-saving investments for the coming year.