If you are an employee of a public/private sector company, you probably have received emails from your HR to submit your investment proofs. And thus a mini-tax saving seasons has kickstarted as we try to make hurried investments in order to avoid seeing a cut in the paycheck for the months of Jan-Mar next year. Here is a short list of some of the common mistakes and misconceptions to avoid while making your 80 investments -
1. First things first - The deadline for submitting your investment proofs is just that. A deadline. Even if you miss it, you can make your investments any time until the end of March and still save tax. The deducted tax will either be adjusted in following month's payslips or can be easily reclaimed while filing your tax returns. These days, the IT department is known to settle tax refund within a few days, along with interest due to the user. Kindly don't misunderstand us. We are not recommending to delay your investments, but all we suggest is not to make any hurried choices and repent later. Most of the investment instruments are long-term products and it'll be impossible to reverse a bad investment decision. Which brings us to the available investment choices...
2. Investment choices - ELSS and PPF are not your only choices. There are many other products that offer the 80C investment benefit. Here are a couple of considerations you need to make while choosing your investment product:
- Risk - The most important consideration. Know what risk you are willing to take for your tax investment, just like any other investments. EPF and PPF are a secure choice you can make (backed by the government). ELSS is quite the opposite. Know the risk you are willing to take for your investment.
- Return - Risk is usually correlated with Return potential of an instrument. Something like an ELSS is known to give returns above 20% (last three years), but may as well give negative returns. Remember, it's completely dependent on equity markets. PPF, NSC and other instruments, however, give you fixed returns that you know at the time of investment.
- Liquidity- This is very important if you are going to be dependent on your tax savings in the near to medium term future. PPF should be thought of as a 15-year investment, NSC, a 5 year one. Technically ELSS is a 3-year instrument. However, by the virtue of being an equity-focused product, you should have a horizon of at least 5 years while investing in the same.
- Tax treatment- Whenever you are evaluating returns, always consider the post-tax returns of the product. ELSS gains are tax-free after one year. PPF ones too are exempt from tax at the time of investment as well at redemption. The same is not the case with other instruments. Do your research before investing in any of these products
3. Know your remaining 80C benefit - Do make a note of EPF investment already made by your employer and other Life insurance premiums you already are paying for. You only need to invest so as to take this total investment to 1.5L. Make any extra investment and you are locking away your money for a long term without any added returns or tax benefits.
4. Stay away from Insurance plans - Whatever you do, just say no to your bank representative or your friendly neighbourhood uncle/aunty. Either these policies are too expensive, or just suck away liquidity from your portfolio without any added benefit in return. More on our opinions about ULIPs here. The fundamental problem with ULIPs
Our suggestion - For all the reasons stated above, we believe any investment (over and above the mandatory EPF investment) should be made primarily in PPF and/or ELSS schemes (Kind of makes the point 2 above redundant, doesn't it?). With PPF, know that your money will be safe but will be locked away for at least 7 years. With ELSS, you have a much shorter lock-in period of three years. You may get better returns. But you may not as well. Make this investment in line with your desired asset allocation of the overall portfolio. For a list of recommended ELSS schemes, you can refer to our fund selection page to view our shortlisted schemes (revised every 6 months). Do have a look at our previous post here as well - 4 things you NEED to read before investing in ELSS.
Hope this helps you plan your investments. Let us know your thoughts. Happy investing!
PPF - Public provident fund
EPF - Employee provident fund
ELSS - Equity Linked Saving Scheme (Mutual Fund)
ULIP -Unit-linked Insurance Plan (Insurance)