Learn how to smartly allocate your money between various tax saving instruments for maximum gain
13-Dec-2006 •Research Desk
In Make money & save on tax we showed you all the fixed-return tax-saving options. But blindly investing in one or two of them will not do you any good.
Other than fixed-return, we also have the Equity Linked Savings Schemes (ELSS) which are mutual funds that give a benefit under Section 80C. These have a three-year lock-in and give higher returns than its Section 80C peers.
You need to figure out how much of your tax-saving investment must be allocated to fixed return. There is no standard answer and you have to take a look at your investment portfolio.
Let's say that it is your first job and you want to invest for the long-term. Since you have age and time on your side, the best investment would be the equity-linked savings schemes. Of course, it is always good to also have a fixed-income instrument in your portfolio and if you are a salaried employee, then your PF would give you that option. If no provident fund is available, then opt for PPF.
If you have already invested in mutual funds or in the stock market and have no fixed-return investment, then bypass ELSS as a tax-saving option. If you have only fixed return investments, then maybe you could allocate most of your tax saving to ELSS.
If you are close to retirement, then just a small portion must be allocated to ELSS and neither would PPF make sense with a huge lock-in period.
Once you decide how much to allocate to fixed return instruments, the next step would be deciding which fixed return investment to opt for.
A debate always rages between PPF and NSC. Over here, the timeframe will be the main consideration. NSC is only a six-year investment as against the 15 years for PPF. So if you need the money much sooner, then NSC scores. However, if you are looking at a long-term investment that you can stash away for retirement, then PPF is the best option. If you invest Rs 70,000 every year in PPF for 15 years, you will end up with more than Rs 22 lakh.
Or, if you have surplus funds in spite of touching the Rs 70,000 limit of PPF and you want a fixed-return investment, then NSC would be the next logical choice. If you are looking at the shortest tenure, then you also have infrastructure bonds (3 years onwards) and bank deposits (5 years) to choose from. The interest rate from these investments
should hover around 8 per cent, the same as NSC.
Play it right
To be a smart investor, you must realise that tax planning is a year-round event and not something to be shelved till March. The best time to plan your tax investments is at the start of the financial year to help you take maximum advantage of opportunities to reduce your taxes. Especially if you are going to invest periodically.
Where investments like ELSS are concerned, it makes sense to allocate a fixed amount to them at the start of the year. Every month, with the help of a systematic investment plan (SIP), allocate a small portion to your fund. You need not buy your NSCs at one go either. With PPF, you have the option of 12 deposits in a year. Where bank fixed deposits are concerned, you can open them during the year at different time frames. Let's say you decide to invest Rs 20,000 in a five-year bank deposits. If you have just Rs 10,000 available to invest at the start of the financial year, you can go ahead and open a five-year bank deposit. Six months later, when you do have surplus cash, you can invest the balance Rs 10,000.
So you don't need to have all the money at the start of the financial year to make your investments. Do them as the year progresses but plan for them at the start. And, for heaven's sake, don't leave them for March.
By the way, within four months the financial year will be over.