Invest smart, save tax:: Business Line

Besides saving on taxes, choose instruments that meet your objectives.

With March around the corner, it’s time you start thinking about your tax-saving investments for the year if you haven’t done so already.

Scrambling at the eleventh hour could mean getting rushed into investments not best suited for you.

Especially when there’s so much to choose from — provident funds, bank deposits, equity, insurance, equity-cum-insurance, pension plans, and many more.

An investment of up to Rs 1 lakh each year in any or all of these instruments is allowed as deduction from your taxable income under Section 80C of the Income Tax Act.

This can save you a tidy sum in taxes — up to Rs 30,900 for those in the 30 per cent tax slab; Rs 20,600 in the 20 per cent tax slab; and Rs 10,300 in the 10 per cent tax bucket.

But the tax saving is just a carrot; these investments are really meant to help build a corpus for the future by salting away a tidy pile year-after-year in long-term investments.

Most 80C investments have long lock-in periods — from three years for equity-linked savings schemes (ELSS) to as many as 15 years for the safe-as-houses public provident fund (PPF).

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One for everyone

There is no one-size-fits-all approach when it comes to 80C instruments. Take your pick after weighing in your age, objectives, risk profile, and return and liquidity expectations.

If you are young and raring, with the stomach to take on risk for higher returns, put some money into well-performing ELSS schemes.

The dividends you receive are tax-free, but be prepared for some speed bumps when it comes to the value of your investments.

As you age and look to create a corpus for your retirement or expenses such as higher education of kids, you may probably be more comfortable deploying more money in safe fixed income instruments. In this category, PPF is a very good option.

The tenure of a PPF account can be extended by five years to a maximum of 20 years.

With an 8.7 per cent tax-free return currently (this can change each year) and annual compounding, the PPF is also one of the best ways to build your retirement nest — making it a good option even for young investors. The national savings certificate (NSC) is also a safe avenue to build a healthy corpus. It offers 8.5 per cent annually for a five-year tenor and 8.8 per cent for ten years.

The interest compounds half-yearly and qualifies for reinvestment under Section 80C; so with only the last year’s interest being taxable, post-tax yields are healthy.

But one of the big strengths of PPF and NSC — that they compound returns instead of paying them out — can be a weakness for those seeking regular flows from their investments. . Retired people often seek regular returns.

This category of investors should consider putting money in the five-year Senior Citizen Savings Scheme (SCSS), which is safe and offers 9.2 per cent interest annually (taxable), with pay-outs on a quarterly basis.

The investment can be extended by three more years.

Those looking for regular payouts can also consider long-term (five years and above) tax-saving fixed deposits with banks.

The interest rate on these deposits is around 9 per cent currently, with an additional 0.50 – 0.75 per cent usually offered to senior citizens. You can get the interest at regular intervals or choose to accumulate it till maturity. But in any case, the interest is taxable.

Do the math

Remember there is a cap of Rs 1,00,000 each year for 80C investments. Funds deployed above this limit do not give you tax breaks.

So, when deciding on where and how much you much invest, do the math. Take into account investments already made and expenses incurred, which form a part of the overall limit.

For instance, the amount deducted each month from your salary as your contribution toward the employees’ provident fund qualifies for deduction. So also does any additional contribution you make through the voluntary provident fund.

In addition, the principal payment on your home loans, whether as part of the monthly instalments or as prepayment, is covered under Section 80C.

Furthermore, the premium you pay on life insurance policies or unit-linked policies (if the sum assured is at least ten times the annual premium) is covered in the Rs 1,00,000 limit.

Even tuition fees spent by you on the school or college education of your children (restricted to two) can be claimed as deduction.

Wise asset allocation

Choose your Section 80C instruments to complement your existing investments and build a well-rounded portfolio.

If you are already invested heavily in equities either directly or through the mutual fund route, investing in ELSS may not be smart . Rather, you should consider deploying money in debt instruments to benefit from the safety and diversification they offer.

Similarly, you can consider the ELSS for potentially better returns if your current portfolio is skewed toward debt .

A healthy life insurance cover is a must-have for those having dependents. With premium paid on life policies covered under Section 80C, use the window to get significant life cover at a cheap rate. Choose economical online pure term plans over costlier traditional plans or ULIPs.

Also, plan for your retirement income before hanging up your boots − do this by investing in the New Pension Scheme (NPS), among the most cost-effective ways to generate regular pensions. Here, you can choose the allocation to debt and equity as per your risk appetite.