When Yamini started her career in June 2019, she also wanted to begin her long-term investing journey. While she was clear about her goals, we wanted to instil the habit of savings in her and suggested a combination of equity-linked savings scheme and Public Provident Fund to balance out risk and safety in the long term. Similarly, when investing to lower your tax liability, you should understand the need, objective, time horizon and risk profile before investing. Here are some popular investments and the things you should keep in mind before investing in them to save taxes.
Life insurance plans
People often end up buying life insurance on the recommendation of an uncle or because someone in the office is buying it. This could be the biggest mistake.
Insurance is not an investment option. Insurance should be purchased to cover the risk of life. If an investment component is linked to an insurance product, the returns, typically, fall drastically due to high in-built charges. So if you are looking at insurance as an investment, remember that there are several other options that are eligible for deduction under Section 80C that offer more flexibility, liquidity and returns, and also target certain objectives such as retirement.
In 2006, the budget announced a benefit of ₹10,000 under Section 80CCC for investment in pension insurance plans. It has now been combined with Section 80C under the ₹1.5 lakh limit. Several employees of a software company invested in this plan, just to claim the additional net tax saving of ₹3,000 per annum.
Unit-linked insurance plans (Ulips)
These are usually mis-sold with the promise of guaranteed returns, quick money-back of invested capital (within five years) and returns of above 25%. Returns are not guaranteed in Ulips and often the detailed illustration, including the charges, is not shown to the investor. Once again, here the investment is made for higher returns, lower lock-in period and tax benefits, all of which defeat the objective of the investment need.
Sukanya Samriddhi Account
This is meant for girl children between the ages of seven and 14 years. Many parents invest for the purpose of meeting the education needs of their children for higher studies.
One important point to note here is that only 50% of the maturity proceeds are payable when the girl child is 21-24 years. Hence, if one is planning to meet the under-graduation expenses of the girl child, there could be a gross mismatch in the amounts needed and the corpus built. Also, one can’t withdraw from this scheme, except in the case of death of the girl child.
Additional NPS deduction
Since the government introduced the additional tax deduction benefit of ₹50,000 for the National Pension System (NPS) under Section 80CCD (1B) over and above the Section 80C benefit, many investors have jumped on to the bandwagon. However, the additional benefit comes to only ₹16,500 per annum (for those falling in the highest tax bracket of 31.2%).
The pension benefits of such contributions at present value would not be more than ₹2,000 per month when they turn 60 years of age. Further, due to inflation, the value of ₹2,000 per month after 30 years would be ₹500.
Investing in a product just to benefit from a strategy or claiming a tax benefit that is not worthwhile could leave you with a baggage of unwanted investments. So stick to the foundations of financial planning and look at your objective, risk appetite and time horizon before investing.
Dilshad Billimoria is director, Dilzer Consultants Pvt. Ltd