Come December-January and salaried individuals get into the last round of tax saving investments. The reminder mails from payroll department makes many to wakes up and look for some option that will help them to save tax. This last hour rush typically leads to some mistakes in selecting the investment instruments. Following notes are about to avoid these mistakes and to ensure better financial results.
Know how much you should be investing?
Its important for us to understand categories of investments to be done, for an easier understanding let us separate the investments into Tax Saving Investments (TSI) and Life Saving Investments (LSI). Investments to be done to save the taxes, and investment to build your assets, (to live a more comfortable lifestyle and accumulate wealth to secure your future financially). Please note, returns/earnings from tax saving instruments are lesser as compared to other investments.
Where to do the Investments?
Review the stock of your existing investments, expenses and repayments eligible for tax saving under Sec 80C, your risk-taking ability, and your investment needs before investing your hard -earned money.
Do not go with the tele-caller’s requests of ‘fill the form and you are done’ or ‘easy to do’ investment at the door-step. That leads many to putting all the money in one instrument. For example, a call from your bank offering ‘Tax-Saving-Bank-Deposits at a click of a button makes an individual invest all his money in this easy to do investment with very minimum time. While this saves a bit of your time now, you will be losing your long-term goal of asset accrual, or simply this approach ignores his investment needs and financial goals.
Do not make the investment decisions, just because a friend selected the investment instruments. Think of the future premium payments of these instruments too, Investments in Life Insurance Policies, PPF, NPS etc. expects you to contribute every year. If these avenues do not serve your investment needs, then you will repent for rest of the years, as you will be forced to contribute year after year or let the money go which was paid in the first year.
How much to Investment in Tax Saving Instruments?
The easy way out is to sort all investment options based on the past returns and pick the one that has offered the best returns in the recent past. Take a stock of your financial situation and invest in an avenue that suits your needs.
Though Section 80C of the Income Tax Act let you to save tax on investments up to Rs 1.5 lakh each year in stipulated investments, you should not blindly cut a cheque of Rs 1.5 lakh. Please review your existing commitments such as contribution to employee provident fund, school fee payments, premium paid towards life insurance policies, repayment of housing loan, etc., will account for this Rs 1.5 lakh amount. So, you need to do tax saving investments that much money which will be left after accounting for all these payments. Also consider the taxable income. If the taxable income is less than 2.7 lakh or there is no taxable income after accounting of the investments made already, then there is no need to invest more under TSI. So, to make it very simple way and straight – don’t over-invest for tax saving purpose.
Tax saving beyond Section 80C
Review the options to invest in National Pension Scheme (NPS) under section 80CCD, investments upto Rs.50,000/- is eligible for tax benefits. NPS contribution made through your employers is completely tax free, upto 10% of annual basic salary. (But this is long term investment and ideally can withdraw at the age of retirement only. Keep this investment for your retirement age only)
Make sure you have health insurance premium, though your employers provide some supports in health insurance, that may not be sufficient to cover the entire treatment expenses, especially with today’s scenarios with the misfortunes happened in the private hospitals in NCR. Health insurance premium is eligible for tax saving under section 80D.
Treatment of your dependents for the specified diseases like Neurological Diseases and Malignant Cancer are eligible for deduction upto Rs.60,000/-.
Interest payment education loan taken for self, spouse or children is eligible for tax saving under section 80E.
If you have donated money to charitable institutions then you are eligible for tax shelter under section 80G. This reduces your tax liability. Account for these too for your taxation. (Though a small amount, account it and recontribute the saved amount to other generous needs of the society!)
How do you plan Investments?
Decision on investment to be taken based on your approach on taking financial risks. Investing in shares is a good idea to build your assets and accumulate wealth for a more secure future and to have comfortable lifestyle, however it will be challenging for many individuals due to lack of time or enough knowledge of the market. An alternative to this is Investing in mutual funds. Mutual fund is an investment fund managed by professionals wherein the investors pool money which is used to purchase different kinds of securities. A diversified, properly structured, portfolio of securities will help you to attain your financial goals much faster, and with less financial risks, as compared to any other investments of today.
Suggestion to the moderate investors to have some diversified portfolio of Mutual funds, Public provident fund, National pension Scheme, Fixed Deposits, and others. A moderate/ aggressive portfolio will be 50-60 percentage of Equity linked (mutual funds) investments, 40 to 45 Fixed Income Investments and 5-10 percentage Cash and equivalents.
If you are a conservative Investor, still suggest having reasonable percentage of Mutual funds in your portfolios. Public Provident Fund, National Saving Schemes and bank deposits are good to have a fixed income, however adding 20-30 percentage of your Investments in Mutual Funds will fuel the Asset building. Need to keep a 5-10 percentage for Cash and Equivalents and rest can be in the above said fixed income schemes.
The Bottom Line
Overall, a well-diversified portfolio is your best bet for consistent long-term growth of your investments. It protects your assets from the risks of large declines and structural changes in the economy over time. Monitor the diversification of your portfolio, making adjustments when necessary, and you will greatly increase your chances of long-term financial success. Good Luck.