Look Beyond Insurance To Save On Taxes

Investors must purchase a policy only to ensure adequate risk coverage

Less than two months remains for people to invest wisely and save some taxes

before the financial year ends on March 31. Although tax-planning should be done at

the start of the financial year, the reality is that most people prefer to invest during the

last three months of January, February and March -or JFM months -when it becomes

absolutely necessary to act.

Financial planners www.arthayantra.com say that, although most people go for tax-

saving options which are most convenient to them, ideally each should plan their tax-

saving investments keeping in mind some specific factors like age, income level, risk-

taking ability and financial goals. There should not be a one-plansuits-all approach

here. It's even better if the annual tax-saving plan becomes an integral part of an

individual's financial planning exercise.

The two other articles on this page will give you some idea about the various

investment options to save on taxes.Here, we will discuss the advantages of some of

the investment options, which ones score over the others and how, and some common

tax-planning mistakes that you can avoid.

One very important thing to note here is that since the last Budget in July 2014,

people have the option to invest up to Rs 1.5 lakh each year in tax-saving instruments,

up from Rs 1 lakh earlier.

FDs are highly tax-inefficient

The popular investment options for taxsaving are equity-linked savings schemes

(ELSS) from mutual fund houses, public provident fund, life insurance policies, pension

plans, Rajiv Gandhi Equity Savings Scheme (RGESS) and select fixed deposits with

banks.

According to Tarun Birani, founder and CEO, TBNG Capital Advisors, a survey

revealed that nearly 56% of total household savings are parked in taxsaving fixed

deposit schemes where the money has to be parked for at least five years. “However,

FDs are highly taxinefficient products since the entire interest earned is taxed as

income at the rate applicable to the investor every year,“ Birani said.

“One of the prospective clients I met was invested in a 10-year cumulative fixed

deposit from April 2013. On maturity in April 2023, he is eligible to get the principal and

cumulative interest earned, but he was paying tax on the interest component every

year,“ Birani said.

Logically, since FD rates match the rate of inflation in the economy, these

instruments at best preserve investors' purchasing power but do not help in creating

wealth in the long run. On a post-tax basis, investors end up with negative real returns.

These instruments, however, offer guaranteed returns to investors.

ELSS are market-linked tax-saving mutual fund plans which come with a three-year

lock-in -the shortest lock-in among all the tax-saving instruments available in the

market. But there's a risk caveat financial advisers repeatedly stress on for this

instrument for most investors.“These are one of the best investment avenues that

investors should consider, provided their risk profile matches the risks associated with

investing in ELSS plans,“ Birani said.

Compared to ELSS and bank fixed de posits, PPF has an effective lock-in of seven

years.In insurance, most products other than term plans that qualify for tax sops

require the buyer to pay premiums for at least three or five years, else heshe will lose

the entire premium and not get any return on the previous years' payments.

Tax-planning mistakes

According to Nitin Vyakaranam, Arthayantra.com, not differentiating between

investment and non-investment related products under section 80C is one of the

biggest mistakes people make.

“Savings under section 80C can be broadly classified as investment-based, like PPF,

EPF, VPF, NSC, bank FDs, ELSS, RGESS, etc, and non-investment based like principal

repayment of home loan on first home, tuition fees, insurance, etc.

Though not an investment, insur ance is often considered as a long term

investment and remains a preferred tax-saving instrument. One should refrain from

buying unnecessary insurance products for the purpose of tax savings,“ Vyakaranam

said.“The purpose for taking insurance cover should be to ensure adequate risk

coverage, not tax savings.“

Another common mistake is not understanding the benefits of section 80C in

totality .

“We often ignore the various contributions that can account for deductions in this

section. The investments under 80C should only be made after assessing contribution

to one's provident fund account, home loan principal payment and tuition fees of two

children, etc,“ Vyakaranam said.

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