Are you going to wait till December or even January-February next year to make your tax-saving investments or are you going to learn from your past mistakes? The financial year has begun and there’s no better time to get started on your tax investments than right now.
After all, as financial trainer P. V. Subramanyam points out: “The most common mistake is that investors only wake up on the cut-off date given by their HR department to make their tax-saving investments when they should start at the beginning of the financial year itself.”
Adds certified financial planner Gaurav Mashru-wala: “Focus on your financial goals and tax planning will happen automatically, as our IT Act gives tax breaks for everything from life insurance to savings.The biggest mistake is to look at financial goals, tax planning and investments separately.”
Lovaii Navlakhi, managing director and chief financial planner, International Money Matters, agrees. He says that investors should start off by setting a target amount of their savings — and spends — for the financial year ahead. “Even if an investor hasn’t made a long-term financial plan, he should still set some targets and then work out how to achieve those goals,” he says. For instance, identify when your big cash flow requirement will come up during the year and where you will source the funds to meet it.
Of course, the Rs 1 lakh limit under Section 80C is already crowded as it includes everything from employers provident fund (EPF) to investments in equity-linked savings schemes (ELSS). But every financial planner will tell you not to invest for the sake of tax breaks alone.
“If someone has exceeded the Rs 1 lakh limit from EPF alone, then if he needs insurance, he should not decide to not take it just because there is no tax benefit,” says Navlakhi.
Subramanyam cautions: “Don’t buy insurance for the tax break alone when it will give you a pathetic return on investment. If you need it, take term insurance where the premium is low.”
The ELSS continues to be an attractive option. “The younger you are, the more equity-oriented should your investments be. Also, since the EPF contribution is fully invested in debt, it makes sense for tax-payers under 40 to put some of their 80C limit into equity with a tax benefit,” says Subramanyam. If you’re planning to invest Rs 50,000 in ELSS, “it’s best to put Rs 4,000 every month since averaging works in equities”, he adds.
On the other hand, Navlakhi says that an investor who already has adequate exposure to equity should not invest in ELSS just for the tax-break, especially if he can’t afford the three-year lock-in. Mashru-wala also points out that for investors, EPF alone or the EPF plus their children’s tuition fee covers the Rs 1 lakh limit. “They’ll go to an agent and then invest more than Rs 1 lakh in 80C products,” he says.
Remember, the Rs 20,000 limit for investments in infrastructure bonds is no longer available. As for the Rajiv Gandhi Equity Scheme announced in the new budget, it has still to be notified.
By Aarti Dua