It’s the time of the year when individuals rush to sign up policies or do investments which have no direct link to their financial goals but more to do with saving taxes. Insurance agents get on a calling spree to sell their products, be it life insurance to get you exemption under section 80C or medical policies to get you exemptions under section 80D or any other. These calls can be pressurizing and persuasive given their tax advantages. For example the life insurance policies qualifying for section 80C deductions, you get triple benefit i.e. provision of risk cover, investment return and tax exemptions.
A financially savvy person would always plan the investments, availing tax deductions, in the beginning of the FY not at this juncture. He/she would carefully attach all the investments to financial goals, be it risk management or investments for the long term and short term goals.
However if you are still one of those who missed the boat early this financial year, then here is a checklist for you to ensure that you don’t sign up for something that you would regret later. Penny saved is penny earned!
Section 80C & Life cover – If you have already paid the premium for your life insurance policy and the sum assured is at least 10 times the premium paid, then the premium qualifies for a tax deduction under section 80C. Term plans, traditional endowment plans, money back plans and unit-linked insurance plans come in this category. Your objective view on how much should your sum assured be is assessed when you have comprehensively understood your family dependencies on you for their financial goals.
Section 80C & Long term goals – For long term goals such as retirement, higher education goals for your children & their marriage, one can consider availing tax exemptions by making contributions to employee provident fund (EPF), public provident fund (PPF), equity-linked savings scheme (ELSS) and national pension system (NPS). In tax parlance, EPF and PPF are exempt-exempt-exempt products and are far more attractive than NPS, where the maturity proceeds are taxable. Understanding the future value of money for your long term goals and determining the way to grow that money from your current savings and investments requires an in-depth analysis.
Section 80C & Medium term goals – For medium term goals i.e. goals that are 5-7 years away from today, you can consider investing in notified fixed deposits of 5 year tenor. The interest is taxable though. The other option is 5-year National Savings Certificate (NSC). The interest rates are comparable. But NSC scores over FD as the accrued interest is deductible if it’s reinvested next year. However doing an comparative analysis of all investment options that are available with their returns on investments post tax is an exercise that needs to be carried out before you invest in a five-year FD or an NSC instrument.
Section 80D & Health cover – If you have already paid health insurance premium of up to Rs 15,000 either directly to your health insurance provider or through your employer towards group health insurance, then you are all set. You don’t need to buy another health insurance policy to save taxes. You can buy one based on merits if your planner has advised you taking into consideration your existing policy benefits to you and your family. You get additional deduction of Rs. 15,000 or Rs. 20,000 if you are buying policy for your parents depending on whether they are senior citizens or not.
Mind you, there are a lot of options that you can use as investment and protection vehicles under section 80C and 80D. Don’t rush to buy new products, given the end of fiscal round the corner. In the last minute rush to save taxes, people do pick up investments that were not required at all. If the financial goals have already been identified and planned for, the year-end deadline won’t matter.
Leaving everything to the end of the year may lead to bad investment decisions. You must stagger your investments across the year. It takes the pressure off your cashflows and inculcates financial discipline. It’s your focus on financial goals that will lead you to financial success. Comprehensive financial planning exercise with your planner will lead you to do investments in a tax-advantaged way, so why bother taking calls from the insurance agents if you have already taken the wise step of financial planning for your future.