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Save Tax Through The Year To Avoid A Taxing Year End

Monday, September 10, 2018
By Amar Pandit

Amar Pandit, Founder & Chief Happiness Officer,

The Hare and Tortoise story from Aesop’s Fables leaves a lesson for personal finance as well. As in the race, the strategy of making small but regular strides is more likely to lead to success than last-minute super strides made in hurry.

We are in the second quarter of this financial year and if you haven’t planned about the best way to save tax through investments then now is the good time to start. People who leave it for the last-minute often end up with a jumble of products that cost too much, yield little and are a drain on the overall portfolio.

However, before we delve into investments, check how much of your 80C/D deductions may already have been taken care through any payments you may be paying:

Life and health insurance: If you are paying premiums for life insurance then you can claim deduction for the premium under section 80C. Everyone having dependents and/or liabilities needs a term cover that will, in their absence, take care of the dependents until the dependents no longer require financial backing, and to pay off the liabilities.

Similarly, everyone needs a health insurance cover. If you are already paying premiums for mediclaim for yourself or your parents, claim deduction under section 80D.
Home loan: The principal part of home loan EMI is eligible for 80C deduction and the interest is deductible under section 24.

Education loan and tuition:  School fees are ever skyrocketing. Your children’s tuition fee is one of the expenses that can be claimed for deduction under 80C.

Interest on a higher education loan taken for yourself/spouse/child is eligible for deduction for 8 years of repayment under section 80E.

EPF contribution:  if you are a corporate professional, at least Rs 21,600 of your Rs 1.5 lakh deduction allowed under section 80C is taken care of by your EPF contribution.

After considering these if you are still left with the scope to save tax under 80C, then you need to think about what instruments you will chose and how to spread out investments in them. Given that tax saving is the only reason for many people to save, with better planning these investments can become great assets for life.

Choose wisely to grow wealth while saving tax
PPF, traditional insurance policies, FDs are some of first things that come to investors’ mind as the deadline approaches. However, ELSS (Equity Linked Savings Scheme), which are equity mutual funds with tax benefits, give you the unique opportunity to create wealth while saving on tax.

For any long term goal (5 or more years away), inflation becomes a serious consideration. Unless your investment outgrows the pace of inflation, your corpus from that investment cannot be expected to sufficiently meet your goal. Equities as an asset class has displayed the potential to outgrow inflation in the long run, making it an ideal vehicle to plan for goals such retirement planning.

As with the other tax saving deductions, there is a lock-in period or minimum investment period for ELSS, which is 3 years. As a matter of fact, ELSS with 3 years has the lowest minimum investment period among all the options under IT section 80C – the rest have 5 years or more.

That said, 3 years is not the ideal period to stay invested in equities. With equities, a longer time horizon of minimum 5-7 years is desirable because that allows for a complete business cycle to take effect. Business cycles on average are thought to last 5 years. Moreover, due to the compounding effect of returns, longer the time horizon the better it is. An important implication of the compounding effect is that, the earlier you start investing towards a goal, smaller the contributions required, compared to starting later.

Now let’s view a comparison of how your tax saving in different instruments can grow over time. Say, you’re 25 and have identified that based on your current lifestyle you need a corpus of Rs 11 crores for retirement. If you invest Rs 5,000 monthly in ELSS/LIC/PPF until you reach the age of 60, the investment would look like shown in the table below.

So, the savings in ELSS would have grown to Rs 5.4 crores. Just like that, while you weren’t looking you would have accumulated nearly half of the retirement corpus!

How your tax saving investments align with national goals
As a matter of fact, while your investments for saving tax will help you save a few thousands each year and will form part of your savings, they also help to realize some financial agenda of the government. Governments use taxes as the proverbial carrot-and-stick approach to induce desirable financial behaviors. Home ownership is an area which the government encourages; this explains the generous deductions on home loan payments.

Higher level of national savings is another trait that our tax policy seeks to promote. Within that, savings in financial assets, particularly in equities, is highly encouraged.

Old age social security is also big on the government’s agenda, especially in this era where employer provided pension hardly sums up to anything compared to the actual requirement. Now you know why there are deductions given for different instruments like EPF, NPS, SCSS and other pension/retirement related schemes.

Thus, by making wise decisions with your tax saving investments, over time you can build a sizeable corpus which can be earmarked to supplement your retirement goal. Take the SIP route, where your contributions happen automatically month after month, for as many years as you like… no last-minute scrambling, no time or energy wasted identifying ideal products year after year. And, at the end of each financial year, the contributions would qualify for the 80C tax deduction.

Slowly and steadily you have reached the destination of your goals while clearing the check post of tax savings every year!

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