Dhirendra, just a few weeks back, in March, most of us were scrambling with tax-saving investments. And again in approximately a year's time, we would be going through the same rigmarole. Is there a better way to do this?
Dhirendra: It's a human tendency to delay and procrastinate things until the time they fall on us. Similarly, we also delay our tax-saving investments till late in March when we get a warning from the accountant that if we fail to invest before March 31, we will miss the final opportunity to claim our income tax refund. It is then we rush to invest.
The problem is that in the last minute, you don't think objectively. You just look for the easiest tax-saving instrument and go for it. I would say that now is a good time for anybody who is thoughtful, to plan his investments and start saving taxes. Any taxpayer can avail a deduction of Rs 1.5 lakh under Section 80C. There are a number of investment avenues and some spending alternatives, too, which are eligible for deduction under Section 80C. For example, the tuition fee paid for two children, life insurance premium or fixed-income alternatives like Public Provident Fund (PPF), National Savings Certificate (NSC) and five-year bank deposits.
Besides, you also have tax-saving mutual funds, which are pure equity funds. They are the best alternative, as they help you earn inflation-beating returns over a long period of time.
If you find it difficult to save from your monthly income, I would say at least try and save this Rs 1.5 lakh under Section 80C and be methodical about it. The first advantage is that you save on the tax. Saving tax is earning money. In addition, if you invest this amount in a planned manner, it can translate into something significant.
Investing Rs 12,500 every month for this purpose is a better alternative than investing the entire sum at the end of March. It also goes well with your income cycle. You earn every month, you spend every month and therefore, you must invest every month. With this, you do not need to worry about the deadline of March 31. Waiting till the deadline is actually problematic. Many times, you don't have money and then, you borrow to invest, which is actually a bad idea. Even the TDS gets deducted and then, you are left with less money, waiting for the refund.
So, don't wait for the last minute. Think about what it can translate into. Use it as an opportunity. Save your taxes. If you earn Rs 6.5-7 lakh a year and you are able to make this Rs 1.5 lakh investments, it can actually bring you to a zero-tax bracket, since this year's budget has a provision that if your taxable income is Rs 5 lakh or less, you will get a full tax rebate of up to Rs 12,500.
And is it that when we rush, we pick up the wrong product?
Dhirendra: Yes. You don't ask questions because you are in a hurry. And then, you end up with endowment policies or any other such long-term thing, which may not be useful for you. It may also not have a good performance track record. It is ultimately an opportunity loss.
See, there are three to four guidelines that should be followed and tax-saving should come later. You should have your hierarchy of savings, investments and spending in place. The first and foremost is that if you have dependants, get a term life insurance. But if you don't have any financial dependants, you don't need life insurance. Then, you should also have your emergency fund in place, along with a reasonable health insurance cover. Otherwise, any small issue will derail your saving and investment plans.
Once you take care of all the above-mentioned things, then you should look at exhausting your 80C limit to save your tax. A good part of the Section 80C limit gets exhausted by the mandatory Employees Provident Fund (EPF) deductions. For the residual, just go ahead and invest in tax-saving funds. If you have been investing in PPF, I would ask you to reconsider it. Because it's a fixed income product with a long lock-in of 15 years. On the other hand, if you look at the performance of equity over any 15-year period, it would be far better. So, if you want these investments to turn into something meaningful, invest in ELSS.
So are you suggesting investors that they should avoid investments in NSC and PPF?
Dhirendra: Yes. Avoid the fixed income alternatives like PPF, NSC and five-year bank deposits. Once you have sufficient emergency corpus, life and health insurance, invest in a tax-saving fund. Over a long period of time, equity will give you far better returns.
Dhirendra, many times, people look at ELSS only as a tax-saving alternative and overlook other benefits. What's your view on it?
Dhirendra: No, that is wrong. It's your money and it should translate into something meaningful. If you are able to take a 15-year or a 20-year view and even if, you are unable to invest anything else, this alone would be sufficient to take care of your retirement. But you shouldn't be looking at it only from a three-year perspective.
There is another reason why you should be spreading the entire investment in Rs 12,500 per month. Most people who are new to equity get shaken by the volatility. Investing in a systematic manner helps them avoid catching a market high. Also, the 3-year lock-in acclimatises you to equity but makes sure that you don't panic and run away because of the short-term volatility. If you stick around, you will get to know its benefits.
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This article was originally published on May 06, 2019.
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