Multiple products are available, some have lock-in period of only three years, while others have lock-in of 20 years
When the deadline to submit investment proof approaches, most investors contemplate, “If I don’t invest now, I will have to pay taxes?” With this, the hunt for tax-saving investment begins.
A lot of options are there to choose from such as NSC, PPF, five year bank fixed deposits, NPS, life insurance, equity linked savings scheme and much more. Most of these investments are excellent choices, if they are suitable for you. However, investors generally end up making sub-optimal choices.
Let us understand this with an analogy. One day Sourav doesn’t carry his tiffin box. During lunch time, he visits a restaurant close by. He looks at the creatively designed menu card, but is unable to decide. So he asks the waiter to get the best item the restaurant makes. The waiter suggests 'Chefs Choice' – one of the most expensive items on their menu. The unique name attracts Sourav and he asks the waiter to get it. After 30 minutes, the waiter gets a dish which is pleasing to the eyes. Sourav starts eating it and surprise… surprise… he realises its main ingredient is brinjal – a vegetable he is allergic to. Sourav's time is running out, only 15 minutes of lunch time left. So he orders an item which is a quick fix. Sourav ends up paying for two dishes and still remains unhappy.
Similarly, investors end up selecting unsuitable tax saving investments due to the following reasons:
Best products may not be suitable for you
Multiple products are available, some have lock-in period of only three years, while others have lock-in of 20 years. Some are low-risk products investing in fixed income instruments while others invest in equities. Choose products you are comfortable with and more importantly, make goal-specific investment to ascertain suitability.
Last-minute decisions are best avoided
When one is trying to meet deadlines, especially tax saving investments, one becomes “An exposed prey” who can be easily caught. Hence, do what is in your best interest by choosing either to:
Pay tax and not invest at all
Invest in products you completely understand like bank fixed deposit. It offers a fixed interest rate where the money is locked in for five years only.
Invest in products with lowest lock-in period (three years) like ELSS, which is an equity linked product, thereby exposing it market fluctuations.
Ignore tax saving investment already done
Many a times, in spite of the regular contribution under section 80C, investors look at investing the entire sum of Rs 1.5 lakh. This is best avoided, since it doesn’t offer any additional tax benefit. Below are two commonly ignored options which offer tax deduction u/s 80C:
Provident fund contribution
Tuition fees
Prior to making fresh tax saving investment, make sure to identify all areas you have invested in this financial year, and whether it offers tax benefits and deductions.
Underestimate wealth creation potential of tax saving Investment
Most people are driven by the concept, “Tax saved is equal to money made”. That’s great. However, many people conveniently forget, “Money not invested well is money lost”.
Tax saving investment if selected well has the potential to create long term wealth. However, the choice of product makes all the difference. Let us understand this based on the actions of three friends Mahesh, Suresh and Rajesh. All of them choose a different avenue to invest their money. They invest Rs 10,000 per month for 25 years i.e. total investment of Rs 30 lakh each.
Mahesh, being an insurance fan, selects an endowment policy; single product offering both insurance and investment. After 25 years, his investment grows to Rs 66 lakh. His money doubles, but is unable to beat inflation.
Suresh, a conservative investor invests in PPF; safe investment which delivers 7.8% CAGR returns. After 25 years, his investment grows to Rs. 85 lakh. That’s better than the insurance policy. Not bad at all.
Rajesh, uses the new-age approach of investing in NPS; investing in a mix of equity and debt. In 25 years, he earns CAGR returns of 12% and accumulates a huge corpus amounting to Rs 1.6 crore. Wow! His tax saving investment made him a crorepati and beat inflation too. That’s wealth creation in the real sense.
When investors are in a hurry to make tax-saving investments, tax savings become the sole focus. Other important aspects like wealth creation, goal planning and suitability don’t get enough attention. Invest smartly by planning your tax saving investment early next year.
DON’T WAIT FOR THE LAST MINUTE
- Multiple products are available, some have lock-in period of only three years, while others have lock-in of 20 years
- Choose products you are comfortable with and more importantly, make goal-specific investment to ascertain suitability
- Prior to making fresh tax saving investment, make sure to identify all areas you have invested in this financial year
The writer is founder and CEO, TBNG Capital Advisors Pvt Ltd
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