Make Your Tax Saving Investment a Multi – Purpose Investment
December 20203 min read
“The Hardest thing in the world to understand is the Income Tax.”
In India About 6 Crore people file income tax and 1.46 Crore actually pay the tax. Hence, about 4.5 Crore people make some provision to save tax by using the existing provisions and various sections. But in our experience, a lot of investors think about making a tax saving investment at the end of the financial year and end up doing so without any process or objective. Tax planning can become a tedious exercise but that shouldn’t stop you from thinking long term and aligning your investments accordingly. Hence, in this blog we are going to look at how a proper tax planning will help you do much more than just save tax.
Are You Investing Just for the Sake of Saving Tax?
If you are investing in any tax saving instrument last minute just to reach that limit under section 80 C, then you are missing out on a bigger picture. There are various options available for saving tax under section 80C. Some of the common options are: ELSS Mutual Funds, Unit Linked Insurance Plans, 5 Year Bank FDs, Term Insurance, PPF, Endowment Plans. A lot of times you can end up with all these in your portfolio if you don’t plan your investment well.
Investing to save tax is similar to normal investing. You should look at below factors before selecting the tax saving option.
- how much risk you are willing to take? – This will help you identify the right investment from the available options as every tax saving investment has different risk attached to it.
- how much liquidity you want? – Tax saving investment by default comes with a lock in period. Some high higher lock in like PPF whereas some have lower lock in like ELSS. Based on how much liquidity you want; you can select the investment options.
- which goal can you map your tax saving investment? – This is the most important question as this will give clarity in terms of your financial goals. If you have long term goals and high-risk appetite, you can invest in ELSS Funds. If you are a conservative investor, you can explore PPF or 5 Year FD.
Once you answer these three questions, you will realise that only 2 or 3 tax saving options are enough for you. Hence, it’s time to introducing tax saving investments in your core portfolio to link to your goals. Here’s how you can covert your tax saving investments into Multi-Purpose Investment.
Not just Tax Saving but also Wealth Creation
Annually every investor must invest maximum 1.50 Lacs under section 80C. You can plan your investments in various tax saving options as follows:
As you can see, we have included only 4 investment option in this plan: Term Insurance, PPF, 5 Year FD and ELSS. That is because except these 4 you do not need any other option. (Sukanya Samriddhi Plan and Senior Citizen Saving Scheme are an exception to this. However, they are useful only in specialised cases like girl child and senior citizen investors respectively. Hence, we have not included these in this plan). Let’s address these 4 options one by one.
- Term Insurance – The only life insurance you ever need is Term Insurance. This will help you get sufficient life cover at cheapest premium.
- PPF – Public Provident Fund can be a great tool to plan your long-term goals like retirement as it comes with a 15-year lock in period. Currently the rate for PPF is 7.1% which gets reset every quarter as per on going interest rate regime.
- 5 Year Bank FD – If you are a conservative investor who doesn’t want any risk to capital at the same time want to invest with lower lock in then this option is for you. However, in falling interest rate scenario, the interest on this FD may not be very attractive.
- ELSS Mutual Funds – ELSS Mutual funds offer the lowest lock in period in tax saving investments i.e. 3 years. But this does not mean that you should take out the money from ELSS funds after 3 years. Remember, like any equity funds, ELSS funds tend to move in direction of markets and longer you hold them better will be the return. You can map these investments to Long term goal like Child’s Education or Retirement to get desired returns.
With this approach, you can make tax saving investments a meaningful part of your portfolio to save tax and to fulfil your goals.
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