As the tax season kicks off this month with firms starting to ask for investment proof under Section 80C. Most of us get this benefit and it has always been exploited by various sales people from insurance, MF or banks etc. The problem mostly lies with us (Investors) as some of us fail to plan and i know so many people who want to use 80C on March 30 every year using whatever option available and end up buying the Tax saving Bank FDs. There are various investment options available under Section 80C investments, though today’s blog is less about the available options and more about How to personalize it.
Most people want to know the universal answer for their investment needs and always want to ask for the best way or best instrument etc. let me re-iterate like a broken record, it is personal finance so please personalize it. Personalizing the 80C investments as any other options should be based on below parameters:
- Post tax returns
- Lock in period/ liquidity of investments
- Asset Allocation to minimize risk
- Goal mapping
- Mitigating contingency risks
Therefore, all the debates about which investment option is best between SSY, EPF, PPF, ELSS, insurance etc are of no use. The right question is what should you opt for. Let’s try to understand them with few examples scenarios:
Case : Sumit has recently started his first job at he age of 22. He stays with his parent, who have funded his education and in turn have accumulated only a smaller corpus for their retirement and will primarily depend on him for funding their final years. He is currently single and plan to get married in 5-7 yrs later and save for his Post graduation. He can save up to 1-1.2 lacs in a year and post this savings under 80C he will be in nil tax bracket. where should he invest?
Sumit is starting his investment journey and If he gets into the debate of best tax saving option and end up being all in ELSS or PPF etc, that would not solve his needs. He need to think of his expenses and most of those will be in short run. And, if this is his only savings then all the 80C investments will be locked in for at the least 3yrs (in ELSS) to 15yrs in case of PPF etc. He should start with below approach:
- Get a life insurance term plan with coverage of at least equivalent to the amount needed as corpus for parents retirement
- Check for the EPF contribution he is making which will be part of 80C deductions and if that is above & beyond the saving capacity of 1.2 lacs then he can use that amount as emergency corpus saved as Fixed deposits/ liquid funds
- Apply for a credit card only to be used in case of emergency expenditure else use it in prudent fashion only on the needs and what can be repaid monthly
- Also check if the medical insurance by the employer covers you as well as parents as this is an unforeseeable risk and a common condition like Dengue can make a dent in your savings. Best is to take a basic cover for medical expenses up to 3-5 lacs and append it with Super Top-up.
- For the remaining money (1.2 lacs – EPF Contribution – Insurance premium – medical insurance premium), he need it to be more liquid and accessible within 5 yrs so only two main options he have in hand are Tax Saving deposits & ELSS. While ELSS is market linked and volatile, Tax saving deposits will have tax on interest earned. He can split his money 50-50 across categories or as per risk appetite.
Therefore, even when most people will rate the tax saving fixed deposits as the worst of the lot for 80C investments, It is beneficial for some due to goal based requirement. There is no one instrument which is the best for everyone in all circumstances.
Next to come, Category review ELSS funds. Keep following us and write to us in case of any queries/ suggestions. Happy Investing!