As the financial year draws to a close, the hustle for tax-saving products grows stronger. The human resources department of your company is after you for proofs of tax-saving investments. Last quarter of the financial year is anyways quite hectic. You are already under so much work pressure. Amidst that you need to find time and mental space to make those investment decisions. Sounds worrisome?
And that’s not enough. To add to the confusion, everybody around you becomes an expert in finance during the period. Always ready to brag about their good and not-so-good financial decisions. You are already under pressure and you have to handle so much noise. What do you do?
Choice of an investment product depends on your financial risk profile and financial goals. In this post, I will talk about how you should approach tax-saving decisions and the mistakes you should avoid.
Do not act in haste. You can make investments till March 31. The deadline by your employer to submit investment proofs may expire much earlier. However, even if you miss the deadline by your employer, you can still make investments by March 31 and claim excess tax deducted by filing for income tax refund.
Go beyond what the salesperson is telling you. You can do that only if you give yourself time. A salesperson will typically highlight only the good aspects of a product but conveniently ignore the risks. You can’t blame them. It is an acceptable sales tactic. It is your duty to make an informed choice. Give yourself time. Do research. Understand the product before purchasing it.
Learn to say No. Almost every one of us has been sold a financial product by a friend or a relative. We didn’t understand the product but still purchased it because the salesperson happened to be friend or a relative. A number of us purchase traditional life insurance plans this way only. Traditional life insurance plans are the kind of plans LIC agents used to sell to our parents. Such plans are opaque; provide low returns and poor life coverage. To be fair to LIC, it is not the only insurance company selling such plans. All private insurers such as HDFC Life, ICICI Prudential and Aviva push such plans too. These plans are a strict no-no. Purchasing such plans is like shooting yourself in the foot. The worst part is either your friend or relative didn’t understand what they were selling. Or they knew and still sold it to you so that they could get heavy commissions. Well, you can’t choose your relatives but you can avoid such friends for sure. Or simply learn to say NO.
Do not invest just to save taxes. Most of us are fixated on Section 80C deduction of Rs 1.5 lacs. A number of people I talk to believe unutilized Section 80C limit is a sin. To utilize the limit, they purchase anything with absolutely no regard to their overall financial goals.
For instance, let’s assume you have some money that you want to use for daughter’s college admission after 12 months. Now, if you invest that money in a PPF account that you opened recently, your money will be locked in for 15 years. You may have saved some income tax but you have just compromised your daughter’s education. PPF is a good investment product but you should have invested the money in a liquid instrument. PPF investment cannot help meet goal of your daughter’s college admission fee.
So, do not be obsessed with just saving income tax. It is this obsession that gullible salespersons prey upon. You would do anything to save tax and they would sell anything to milk hefty commissions. A perfect recipe for financial disaster. I would rather leave my Section 80C limit unutilized than purchase financial products I don’t need.
Consider a few default deductions. Your contribution towards your EPF account qualifies for tax deduction under Section 80C. Tuition fee for up to two children is also eligible for deduction under Section 80C. Similarly, principal repayment of housing loan qualifies for tax deduction under Section 80C. So, if you are only worried about tax–saving investments (and not investing for your goals), do assess the amount under the aforesaid heads and decide how much you need to invest to utilize Section 80C limit completely.
Look beyond Section 80C. There are tax-saving options beyond Section 80C too. You get tax deduction under Section 80D up to Rs 25,000 towards payment of health insurance premium and health checkup too. There is additional tax deduction if you pay premium for your parents too. Interest payment for a housing loan qualifies for tax deduction under Section 24. Interest on education loan is eligible for deduction under Section 80E of the Income Tax Act. Then, there are certain allowances such as medical allowance, conveyance allowance, House rent allowance (HRA) and leave travel allowance (LTA) that can help you reduce your tax liability. So, widen your horizon and do not restrict your tax-saving choices to Section 80C only.
Focus on your financial goals. When you focus on financial goals, it will not only help you avoid certain poor financial products but also help you in product selection. For instance, if you are saving for down payment for a house in five years, a 5-year fixed deposit is better than investment in PPF account (newly opened). On the other hand, if you are saving for your daughter’s education in 15 years, PPF is better suited than 5-year tax saving fixed deposit. In fact, since the time horizon is 15 years, Equity linked savings scheme (ELSS) is also a good option.
There are a plethora of products that offer tax benefits. By focusing on financial goals, you can narrow down your choices.
Your investment decisions shall never be driven by tax considerations alone. Purchase only such financial products that you understand and can help you achieve your financial goals. Random purchases with utter disregard to your overall financial goals will lead you nowhere. For instance, unless you aim for low returns and poor life coverage, you must never purchase traditional life insurance plans.
And from the next financial year, do not leave it till so late to make tax-saving investments. Assess your finances properly at the beginning of the year and start investing accordingly. This way, you will have time to understand the products properly and make an informed decision.
If you feel you do not have sufficient expertise to make these decisions for yourself, invest your time on improving your skills. You can subscribe to a business newspaper and read personal finance section regularly. There are many good personal finance blogs around. Subscribe to their newsletters and read the posts regularly. You don’t have to be an expert. A little bit of knowledge and discipline will help avoid blunders. If you can’t make decisions yourself, seek professional help.