Last Minute Tax Saving- Which option to Select?

It is that time of the year when most of us are busy with planning their investment for tax savings. Since Salaried individuals have to submit proof of their investments to their employer, their search for products is higher during these months.

However, due to this last minute decision making the probability of selecting a wrong product is very high. Lack of self-awareness and sales push by agents drag us to invest in these instruments. The result of this is burden of heavy outflow during these months and discontinuation of most products after a certain period.

Tax planning should be part of your goal planning and should be exercised in the beginning of the year. This not only helps in selecting the right products but ease out the burden of cash outflows leading to efficient money management.

Some of the tax savings products are very long term and ideal for planning your life goals. But most of the times they are neglected due to last minute decisions for only tax savings.

 Given below are the tax saving options available and what should be the objective of investing in these instruments:

1.    Life insurance– Has been the most talked about and favorite tax saving option. Insurance companies consider January, February and March as their highest sales months. Lots of benefits are on offer to the start performers and hence maximum push happens during these months. However, individuals who invest in this product in last moment do it without understanding their requirement. One of the primary reasons is the perception of insurance as an investment product then being a protection cover for your loved ones.

Insurance Planning is one of the important elements of your life goals. It helps in planning for emergencies which can deter yours/family living standard, if arises. Hence it should be planned well in advance and right product should be selected. Take the help of a financial planner if you are not able to quantify your insurance needs. The tax benefit will be availed with the premium you pay.

2.       Public Provident Fund– PPF is a government saving scheme which has a fifteen year term and carry a fixed interest rate. Although, from 1^st Dec 2011, the interest rate is made market linked, it still qualifies as an attractive option considering tax free maturity. Due to various reasons this product remains unutilized by Indian investors. If you have a PPF account, good to utilize it fully for your tax saving needs. You might not have to consider any other option for Sec 80C benefit. Even at the last moment you can invest the lump sum and avail the tax benefit. The biggest benefit of this instrument is the flexibility in investment which eases out most of your financial worries. However, avoid opening a PPF account only for tax benefit. Align it with your life goals which will give you maximum utilization of this instrument.

3.       ELSS– The most disappointed investment for investors. Regarded as a high return tax saving option, the returns from last three year has been dismal and thus investors have been giving a miss to this option now. What is not considered by investors is investment risk which an ELSS carries. It is an equity exposure and every ELSS scheme has exposure in different market segment. For e.g. some schemes have high exposure in large cap stocks while some invest in mid-caps. Thus every scheme has its own risk return characteristics and hence should be considered for long term. In adverse scenarios, If you can hold your investment for five years, you will be able to recover your gains at reasonable returns. However, if you wish to redeem just after three years lock in period ends, avoid this instrument. You might end up with disappointment.

4.    NSC- A five & ten year instrument with fixed interest rate like PPF. Good for consideration when you have exhausted other products. But with PPF limit raised to Rs 1 lakh and tax free interest, this product will lose the sheen for tax saving.

5.   Fixed Deposit- A five year fixed deposit with Sec 80C benefit was introduced last year. With interest rates in higher trajectory it is a good option for risk-averse investors and for last minute investments. However, you should analyze the product once interest rates start stabilizing.

6.    Children Tution Fees- The option is available to families who have school going children’s and the benefit of saving on the tution fees can be availed.

7.    Home Loan Principal Repayment– The benefit is available to individuals who have availed home loan for house purchase.

8.   Pension Products– Benefit of investing in pension products was availed under Sec 80CCC earlier which is now merged with Section 80C.

 Although Section 80C has lot of options to avail for tax benefits, not all instruments can be considered for last minute decisions. Life Insurance & PPF are long term products and should be planned in alignment with your life goals.

Infrastructure Bonds– Were introduced from this year as an additional tax saving option. Rs 20000 is the maximum limit for availing tax benefit while one can invest more. Currently, due to high interest rate scenario, the bonds are being issued by entities with attractive interest rates and hence should be considered for availing the tax benefit. Individuals in highest tax bracket will be able to earn the high post tax yield. However, you need to do a comprehensive research for selecting the right company. Also, there are various options on the table and you should select one which maximizes your yield along with high liquidity.

Health Insurance– Is an option of protecting yourself and family from medical emergencies which can arise in future. The premium you pay for health insurance is available for tax benefit under Section 80D. Up to Rs 15000 can be claimed for self & family and Rs 15000 extra (Rs 20000 for senior citizen) if you are paying for your parents. Invest in the premium after analyzing your need and aligning with the product. This will help in buying the right product and saving you from any dissatisfaction during claims.

 Tax planning is an integral part of financial planning as some of the instruments are on priority when you draw a financial plan. Thus, which option to select should be based on your over-all financial goals and not on last minute decisions. If situation arises, choose one time investment like FDs, ELSS or NSC after considering the risk they carry. Avoid investing in long term instruments which require more detail analyses and affect your lives if planned poorly.