Investment Objectives & Advice

What to chose between EPF, PPF & ELSS for 80C savings?

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:

  1. Post tax returns
  2. Lock in period/ liquidity of investments
  3. Asset Allocation to minimize risk
  4. Goal mapping
  5. 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:

  1. Get a life insurance term plan with coverage of at least equivalent to the amount needed as corpus for parents retirement
  2. 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
  3. 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
  4. 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.
  5. 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!

 

Uncategorized

Tax Planning: B-smart

“Old Habits Die Hard” this is something which I keep experiencing every year. When I was in school, all my friends used to disappear from any kind of games/pass times in the month of February and March as the exams were approaching soon. This was the case when we joined college, It was funny because I always believed in preparing for exams from the start of the year and give small but regular time to studies and avoid any last moment tensions and preparations. When I joined corporate world 6 yrs back, I found that last-minute preparations is not only true in case for exam preparations but adults do last-minute preparations for their tax calculations and investments :).

Why should we plan our Tax saving investments?

Main reason will be that tax planning will help you avoiding wrong selection of instrument at the last moment. You can preserve/maintain the prescribed asset allocation to meet your investment targets. You can manage your cash outflow in better manner by splitting the overall investment into small amounts to be invested on monthly/quarterly basis. Avoiding the notional loss accrued because of wrong timing (It has been noticed that market linked returns are better if invested in Oct-Dec quarter comparing to Jan –Mar quarter). One should avoid doing last-minute easily visible purchases like PPF, Tax saving FDs etc as they are not the best possible options to go for.

How to start planning Tax saving investments?

“First step for any journey is to know your destination” so first thing we need to know is that how much do you need to invest as per different sections of income tax. So once you know your taxable income, you can plan about how much should be invested to claim deductions. There are various sections under which we can save income tax, most common are listed below but one should check with tax consultant to look for exhaustive list of deductions one can claim:

  1. Section 80 C – Upto INR 1,00,000
  2. Section 80 CCF – Upto INR 20,000
  3. Section 80D – Upto INR 35,000

Education Loan interest/ Home Loan Interest and Principal/ Contribution to charity foundations/ Amortization and usage of own vehicle/ Expenses due to certain permanent disabilities or illness are the few other sections to claim deductions. The best way to plan tax is to look beyond section 80C.

Investment Options for Aggressive risk taking investors:

We define aggressive risk taking investors as the person with high income and low responsibilities & short-term requirements. These persons can look for more equity exposure to make the most of the money they investing for tax savings. Some of the most prominent option to look for will be as in the given figure (All under Section 80C).

 

Tax Saving instruments for Risk Takers
Tax Saving instruments for Risk Takers

So do not wait for last moment and start planning now. Please visit the mentioned link for checking your tax liability for this year and see how much should you invest to minimize the tax liability (url: http://www.hdfcsec.com/Calculator/Taxplanning.aspx ). Feel free to write to us for any questions and queries for any of the products or deductions mentioned.