Essential Tax-Saving Guide
Get the most out of your 80C investments for FY2019-20 by planning them well, starting now
By Aarati Krishnan | Jul 29, 2019
Are you one of those investors who barely finds time to make their Section 80C investments through the year and scrambles to make last-minute choices in February and March? Well, you'll be happy to know that you're not alone. Data from AMFI tells us that equity-linked savings schemes (ELSS) saw 51 per cent of their full-year inflows bunched up in the January-March quarter last year.
Such unplanned investments cost your wealth-creation plans dearly in the long run. After all, for many middle-income investors, the Rs 1.50 lakh invested in 80C options makes up a sizeable chunk of their yearly savings.
If you've been guilty of such hasty and unplanned 80C investing, don't worry. You have a great opportunity to do better this fiscal year 2019-20. Here are five ways in which you can rejig your 80C investments so that they make a bigger contribution to your long-term financial goals.
1. Put returns first
If you compare 80C investment options on returns, market-linked products such as the NPS and ELSS offer the best return potential as they add an equity kicker to your tax-saving investment. As timing makes a difference to your equity returns, use systematic investing to phase out your 80C contributions to ELSS and the NPS over all 12 months of the year.
A yearly investment of Rs 1.5 lakh in an endowment plan earning a 6 per cent annualised return for 10 years will lead you to a corpus of Rs 19.8 lakh at maturity. But investing in an equity fund with a 12 per cent annualised return can take your final corpus to Rs 26.32 lakh in the same period, with far more flexibility on your annual commitments as well as exits.
2. Market over assured returns
'When I have assured return options such as the EPF and the PPF giving me an 8 per cent plus tax-free return, where's the need to take on risk with market-linked products in 80C?' That's a big question many investors have. But they forget that the EPF and the PPF are today market-linked products, too. They only carry an optical illusion of 'fixed' returns.
In choosing between the EPF/PPF and ELSS/NPS, you are really choosing between market-linked debt products and market-linked equity products. Now, debt investments are a good parking ground for your money if capital protection is a priority and your goal is less than five years away. But with the PPF being a 15-year account and the EPF locking in your money until retirement, they aren't really useful products for short- to medium-term goals.
For goals that are more than five years away, ELSS or the NPS offer better bets as the equity kicker can prop up your returns.
3. Plan your allocation
Good asset allocation is the key to the success of any long-term investment plan, and should be customised to your age, life stage and risk profile.
If you are a young investor in your twenties, thirties or forties, you can afford to allocate 70-80 percent of your annual investments to equities. You should therefore max out your ELSS and NPS contributions in 80C and make the most of the additional Rs 50,000 limit for the NPS under Section 80CCD (1B) as well. Don't take the easy way out by raising your Voluntary Provident Fund (VPF) contributions with your employer to exhaust your 80C limit.
If you are in your 50s, your 80C investments can still feature a 60 per cent equity allocation supplemented by fixed-income options such as the VPF and the PPF. In the home stretch to retirement, you may rely mainly on debt-oriented options like the NSC and EPF for your 80C.
For senior citizens who are retired and looking for 80C investments, India Post's Senior Citizens Savings Scheme (SCSS) offers a great combination of complete safety of capital, a high fixed income (8.7 per cent interest for deposits made in the January to March 2019) and early exit. 80C products such as traditional insurance plans, ULIPs, the PPF and the NPS are all avoidable at this stage.
4. Factor in liquidity
ELSS funds require you to lock in for a three-year time frame, carrying the shortest lock-in period among the 80C options. Post-office schemes carry a five-year lock in. Ditto for tax-saving deposits from banks and ULIPs from insurance companies. The 80C menu also features some really long lock-in products such as traditional insurance plans, the 15-year PPF, the EPF and the NPS (which seek to lock in your money until retirement, with tough early withdrawal rules).
Young investors in their twenties, thirties or forties who are in a salaried job can afford long lock-in products. But for self-employed folks with lumpy income or retirees with no regular income, liquidity may be a priority. Such folks need to pay closer attention to whether their 80C products offer any early withdrawal options in the event of an emergency.
If you are a young investor seeking liquidity with your 80C investments, ELSS, with a three-year lock-in, is your best bet. If you are a retired investor seeking liquidity, SCSS, which allows early withdrawal after one year (you lose tax benefits though) with an interest penalty, is a good option for you.
Liquidity is also important in market-linked products, where you need the option to exit early if your fund underperforms the market or peers. On this count, ELSS again scores over longer lock-in market products.
5. Don't over-diversify
This problem of over-diversification can afflict 80C portfolios, too. Investors often invest in the NSC one year, tax-saving bank deposits in another and the PPF in the third year. Or having decided to go in for ELSS funds, they invest lump sums in a different ELSS fund every year. Keeping track of the lock-in periods and performance of these schemes can be a real headache over time. This approach also reduces the returns from your 80C savings. It definitely pays to have a running plan for your 80C investments.
Keep the above tenets in mind this financial year to ensure that you get maximum bang for your buck from your Rs 1.5 lakh 80C investment.
Three tax-saving funds for conservative investors
Looking for an ELSS to save taxes but too concerned about sharp swings in equity markets? These three funds may fit the bill