Making the most of 80C :: Business Line

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A well-rounded investment portfolio is imperative for your future financial security and well-being. This is determined, to a large extent, by how much you save and how you invest. A starting point to save and build an investment portfolio is to put your money in instruments listed under Section 80C of the Income Tax Act.

Such instruments serve twin purposes. One, by offering a range of savings and investment options, they help plug the gaps in your portfolio and build a long-term corpus. Next, tax breaks on these instruments goad you to save. The amounts invested in 80C instruments are deducted from the income on which you have to pay tax.

The brass tacks

Until last year (2013-14), up to ₹100,000 deployed each year in 80C instruments qualified for tax deduction. This year (2014-15) onwards, the limit has been increased by ₹50,000 to ₹1,50,000 a year. This can save you a tidy sum in taxes.

If you are in the 10 per cent tax slab, setting aside ₹1,50,000 in 80C instruments can save you tax outgo of ₹15,450 a year. Those in the 20 per cent and 30 per cent slabs can save ₹30,900 and ₹46,350 a year respectively. This is an opportunity you must not let go of; make sure you deploy the full ₹1,50,000 in 80C instruments this year onwards.

Why give the taxman more when you can invest the money, make it grow and also save tax to boot?

But don’t invest just to save tax. That’s just a sweetener.

Make the most of your 80C instruments by taking stock of your financial portfolio, and investing smartly to fill the gaps in it. For this, it is essential that you get into the act early in the year and not wait until February or March to deploy the money.

Making your investments early serves two purposes. It helps you start earning returns sooner. More importantly, it prevents a last-minute rush, which increases the risk of your making sub-optimal choices, given the plethora of options available.

80C instruments are of three broad kinds — expenditure-based, insurance-based and investment-based. Spend-related instruments comprise home loan principal repayments/prepayments and tuition fee payments for your children. Insurance-based instruments include pure term insurance plans, traditional insurance plans, and unit-linked life insurance plans. Finally, the chunk of 80C instruments is investment-based.

These include employee provident fund, voluntary provident fund, public provident fund, long-term bank and post office deposits, pension plans, national savings certificates, senior citizen savings schemes, and equity-linked savings schemes (ELSS). While ELSS mutual funds invest in equity, and pension plans such as the National Pension System (NPS) allow equity investments too, the other investment-based instruments deploy money in debt avenues.

When it comes to 80C instruments, there is no one-size-fits-all approach. Decide on your choices after considering your age, investment objectives, risk profile, return expectations, liquidity needs and the gaps in your portfolio. Here are a few checkpoints to help you decide.

Check your investing room

Under Section 80C, you get tax breaks on amounts invested up to ₹1,50,000 a year. While there is no bar in deploying more than this in most instruments, you won’t get tax benefits on sums exceeding ₹1,50,000.

And in the case of the Public Provident Fund (PPF) — one of the most popular instruments under 80C — you are not allowed to invest more than ₹1,50,000 a year. So, first check how much room you have left under Section 80C.

Say, ₹3,000 is deducted from your monthly salary as your contribution towards Employees’ Provident Fund (EPF). Besides, you contribute an additional ₹1,000 a month towards Voluntary Provident Fund (VPF).

Your annual contribution towards EPF and VPF works out to ₹48,000 (₹4,000 for 12 months) — this automatically qualifies for deduction under Section 80C. That means you can get tax breaks on an additional ₹102,000 in other 80C instruments. Likewise, premiums debited from your salaries towards life insurance are considered under 80C.

If you are paying school or college tuition fees for your children (restricted to two), that too qualifies under 80C. Besides, for those of you servicing big-ticket home loans, the monthly principal repayments during the year could already have exhausted the ₹150,000 limit.

Take note of all such investments and payments when computing how much more you need to deploy under 80C. Also, cut your cloth according to size. Don’t deploy too much in 80C instruments at one go and end up in a situation that requires you to resort to high-cost borrowing to meet daily expenses. Plan and phase out your deployments comfortably over the year.

Insure first

Having adequate life insurance is a must for those with dependants. The thumb rule is that the life insurance amount should be about 10 times your annual income. If you are not yet sufficiently covered so far, this should be your first deployment under Section 80C — before allocating funds to other avenues.

Go for cheaper, online term insurance plans rather than the costlier traditional plans or unit-linked insurance plans (ULIPs). For a 30-year-old non-smoking male, a cover of ₹1 crore under a pure term insurance plan could cost ₹8,000-10,000 a year.

Some of the new ULIPs have investor-friendly features, low upfront costs and the potential to deliver good returns over the long run.

Yet, it is best not to mix insurance with investment; so, go for term plans to meet your insurance needs.

Did you know: Tax deduction on insurance policies under Section 80C is allowed only if the sum assured is at least 10 times the annual premium.

Even if you have exhausted your 80C limit deploying money in other instruments, get yourself sufficient insurance nevertheless — this is a non-negotiable ingredient of any financial plan. That said, if you already have adequate insurance, don’t fall for the sales pitches of traditional plan and ULIP marketers.

Get equity exposure

Most Indians have very limited exposure to equities. The risk associated with equities puts off many investors, who seek solace in the low but safe returns from debt instruments such as bank fixed deposits.

This results in excessive investment in debt to the exclusion of other asset classes. But shunning equities can be detrimental to your long-term financial health.

Unlike debt, equity has the potential to deliver after-tax returns which are higher than inflation in the long run. Exposure to equities is important if you are a young or a middle-aged investor with a fairly long period to go before retirement. The long-time horizon will help you ride out speed bumps in the interim years.

So, if you do not have adequate exposure to equity, make use of the Section 80C opportunity to adjust your asset allocation and invest in well-run ELSS plans.

Choose ELSS funds which have a track record of beating their benchmarks consistently. Among the good ELSS funds are those run by Reliance, ICICI and Axis asset management companies. To get good returns from equity, you need to stay invested for a long period to ride out the volatile phases. ELSS funds have a lock-in period of three years; this ensures that you remain invested for at least a reasonable period.

Did you know: Among 80C investment options, ELSS funds have the lowest lock-in period (three years).

If you choose the dividend payment option in ELSS funds, the dividends that you receive will be tax-free. Gain on the sale of equity instruments held for more than one year is exempt from tax; so you do not have to pay tax on the sale of your ELSS units. Review your ELSS at regular intervals and rebalance if its performance is not up to the mark.

You could go for systematic investment plans (SIPs) in ELSS plans to benefit from volatility in the market, but note that each SIP investment will have a lock-in period of three years.

Did you know: ELSS dividends that are not received but re-invested are also eligible for deduction under 80C. But avoid the dividend re-investment option though — each dividend will also be subject to the three-year lock in, so there is a risk of some of your money getting permanently locked in. It is recommended that you go for the growth option in ELSS to make the most of the investment.

But don’t limit your 80C investments to ELSS alone. Asset allocation — the split between various asset classes such as equity, debt, real estate and gold — is a key element of financial planning.

Asset allocation

A maxim of asset allocation is to avoid taking concentrated bets on any asset class; it is important to diversify your portfolio among various classes to reduce risk. The optimum asset allocation depends on several factors, including your age and liquidity requirements.

A popular back-of-the-envelope calculation is that the equity percentage in your portfolio should be 100 less your age. So, if you are 30 years old, the equity exposure should be about 70 per cent.

But this is just a thumb rule; use it in combination with the other factors relevant to you.

So, for those already adequately invested in equities either directly or through the mutual fund route, it makes little sense to buy ELSS. That could result in over-exposure to a risky asset class.

Also, as you age and look to create a corpus for the education or marriage of your children, moving some money out of equity into safer fixed income investments is a good idea. Also, for those who have retired or are nearing retirement, it makes sense to pare exposure to equities and shift towards safer debt instruments.

At this stage in your life, preservation of capital and steady regular returns should be your dominant financial objectives. This category of investors may be better off increasing exposure in debt instruments eligible under Section 80C.

Even young investors need to have a fair proportion of debt investments in their portfolio to help build a stable long-term corpus.

Weigh in your investment tenure and liquidity needs while choosing from among the various 80C debt instruments (see below “Deciding among debt options”).

Finally, it’s important to declare to your employer the deployments you have made under Section 80C. Some employers adjust the monthly tax calculation only after receiving both the declaration and documentary proof of the deployments.

There is no point in salting away the money but not making use of it to reduce your tax outgo. If you have forgotten to declare the 80C deployments to your employer, you can still do so when filing your income-tax return for the year.

Don’t restrict yourself to 80C

While 80C is a good starting point for your savings and investments, it may not be sufficient to meet your intended corpus and maintain your lifestyle.

So, do invest beyond 80C instruments as per your capacity and accumulation targets, even if you don’t get tax breaks on the additional investments.

Be patient with your investments and have realistic return expectations based on the asset class you invest in. The accompanying graphic gives an idea of how you can utilise your 80C limit.

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