The looming financial year-end deadline has everyone rushing to complete their tax saving investments under section 80C of the income tax act. It is important to look beyond just tax planning while making such investments. With a little planning on maturity period, returns, risk etc one can maximise the benefits out of their investments. Here are some tips for choosing the investments that are best suited for your requirements—Set clear objectives for an investment plan by considering your desired life cover, tuition fees of children, your future cash flow requirements, desired pension levels, home loan plans etc before finalising the investment plan. Plan your investments based on the following parameters:
Risk and return
Returns on some of the investment avenues like equity linked savings scheme (ELSS) are riskier as the same are linked with the stock market performance. On the other hand Public Provident Fund (PPF) guarantees a return of 8 per cent. However, in good times, ELSS can give much higher returns than PPF. So choose your investment avenue considering your risk appetite and desired returns.
Safety of principal amount
There is lesser security for amount invested in ELSS or bank deposits whereas investment instruments guaranteed by the government are highly secure (NSC, PPF etc).
Taxability of returns / maturity proceeds
Avoid investing in instruments where returns are taxable, as the tax reduces your effective returns. For example, interest on provident fund contribution is exempt, whereas interest on NSC and bank deposit is taxable.
Avoid over investment by first calculating the mandatory payments for the year like insurance premium, Housing loan principle, tuition fees etc. and then invest the balance amount in other investment avenues.
Lock in periods for investment can play a key role in investment decisions. For example an investment in bank fixed deposit cannot be withdrawn before five years whereas the tax saver mutual funds have lock in period of three years only.
Plan your investment schedule in advance and spread the investment payments throughout the year to avoid last minute cash flow problem.
Section 80C sets out a number of instruments that are eligible for tax benefit and it is difficult to choose the best instrument. Some of the more popular investment avenues include life insurance premium, contribution to the provident fund, contribution to public provident fund, investment in NSC, payment of the children tuition fee, investment in Equity linked savings schemes (ELSS) like tax saver Mutual Funds and repayment of the housing loan.
(The writer is a Chartered Accountant and founder of RSM Astute Group.)