Saving tax through equity-linked scheme

The last minute dash to save taxes always could end up in a huge mistake. Be aware of the how much one is to save and what the amount to be invested in. If the trade off is not playing in your favour, desist from opting for some long-term investment purely from the point of saving taxes. The predicament comes from our understanding of taxes and the prejudice most Indians associate with taxes. And it’s human tendency to feel pinched to pay taxes.

So while rushing to save taxes, one needn’t compromise on the long-term vision and needs but actually use this as an opportunity to achieve part of the long-term goals. Hence, while making these investment decisions of tax savings, one should consider their risk appetite, timelines and goals so that the short-term needs of tax savings cover the broader dreams. The available options in the tax saving segments are pertaining to 80(C) and 80(D).

The latter is concerned with the health insurance premiums. Personally, I would emphasize having a health insurance plan as a family floater, if married or a health cover. These are beyond the existing corporate covers one enjoys during an employment. Here, I would rather suggest to opt for the higher premium within the limits to not only exhaust the tax saving bracket but also gain advantage of higher covers and especially so if one is young or has young family. This thus helps in mitigating any health related risks or costs that could overturn the otherwise applecart.

The next segment of tax saving opportunity is through the Sec 80(C) which is considerably large in terms of limit but is crammed with various options. The recommendation here is to have prioritization. Of course, an individual with a growing family would find the tuition fee of the children to occupy a sizable part. Then if the individual is an employee, the employee provident fund contribution is another sizable portion that exhausts the limit. Post this, if an individual would have to utilize the limit, then the foremost important consideration to be given is for a life insurance premium and that too ideally for a term-plan.

Term plans are possibly the most economical and convenient way of protecting self from any undesired event of death, disability and disease. All standard tem plans come with a protecting an insured’s life and compensating the economic loss through the available cover so that the dependent’s family gets a lease of buffer.

The term plans could be loaded with accidental death and disability riders which not only provide the basic sum assured upon death but if an event happens due to an accident then an additional amount (as opted) would be paid to the dependents. The disability option is where an insured survives a fatal accident but is disabled to lead a normal life, the rider provides for a payout to suffice the loss of income or livelihood due to this development. So, if the tax savings is a priority then once the initial two options are exhausted then the term plan is mandatory for consideration. Here again, the younger should opt for higher cover.

If one has still limit left to be filled, the next better option would be Equity Linked Savings Scheme (ELSS). These are mutual funds providing tax savings not only at time of investment but also at the time of the withdrawal. The investment is locked-in for three years which is the shortest out of all the available options.

But, the consideration to invest in these should be taken from one’s risk point of view. Undoubtedly, these are riskier investments that the invested amounts are exposed to stock markets. The lock-in also serves as a boon for the investor as it ensures one to remain invested for at least three years. Beyond the lock-in period, one could remain invested and redeem at will.

Of course, those who don’t have appetite for equities could opt for National Savings Certificate (NSC) or Public Provident Fund (PPF) or a bank deposit (FD) with timelines here are over 8 years, 15 years and 5 years respectively. Except for PPF, all the withdrawal gains or interest on the investment is taxed. The other option is the variant of the life insurance premium other than the term plans which are again needs to be planned mapping to the needs or requirements of each individual.

(The author is a practising financial planner and could be reached at [email protected])