Tag: Best tax saving investment

09 Nov 2020
Tax Saving be done early in the year

Tax Saving be done early in the year

Making Tax-Saving Investments only in March is a bad idea!

Our hundreds of interactions over the past many years have reinforced our belief in one common human tendency. In college days, it was referred to as: ‘The rocket takes off only when the tail is on fire!’ While it can be a joke in some circumstances, it has loss-making consequences when applied to investments and money.

This year, talking about this in November seems strange. Typically, the income tax filing deadline is in July and is then extended to August. This time however, we are yet to reach the deadline for filing of income tax returns for the previous year, and yet the ongoing financial year is going to end in less than 5 months.

Hence, we thought it will be a good idea to list down Three key reasons to plan your tax-saving investments and expenses much in advance – maybe right now. In other words, these are the three points that can save you from financial mistakes and hence, monetary losses.

Let us go step by step.

1. Choosing wrong products

The most common mistake that many people fall prey to is choosing a wrong product when deciding in a hurry. While it is understandable that you could be excited and keen to save over Rs 45,000 in taxes if you are in the 30% tax slab, you might miss out the fact that you are putting Rs 1.5 lakh at stake for that tax saving.

So, if you choose a wrong investment product to save Rs 45,000, then you could be putting the well-being of the entire invested capital of Rs 1.5 Lakhs at stake. For example, many people end up buying expensive investment-cum-insurance policies that demand a high premium payment year after year. By the time investors become aware of this vicious cycle, they have already paid one or more premiums. And stepping out of the cycle at that stage could mean a significant haircut (for you!).

2. Choosing the right product, but without a need!

There are of course many smart people who don’t fall for the trap mentioned above. Unfortunately, some of them end up falling in another trap. Take this: Someone understands very well that investment-cum-insurance plans are a bad idea, hence chooses to use a term insurance plan to fill the Section 80C requirements. But to get all of the 80C benefits, you need to invest Rs 1.5 lakhs, and term insurance premiums are pretty low in comparison.

So while the financial plan of the individual might call for a term insurance of, say, Rs 1 crore, he might end up getting multiple similar policies. This is a mistake because the amount can be better utilised in other places and other financial goals.

This mistake is also common in the form of adding unrelated add-ons to health and life insurance policies. This is not to say that these add-ons or riders are never needed. Some of them are really important, but most of them taken in this manner may not be!

3. Not knowing their taxable income

This is for our young friends. Early on in their career, some of them are unaware about their own finances. It is understandable but needs to be rectified. Along with starting investments at this stage, our young friends also need to learn to read and understand basics about taxation and finance. Apologies, went into lecture mode!

So, what is happening is that we come across youngsters who have made investments up to Rs 1.5 lakhs for 80C benefits, that too in inappropriate products. The kicker is that they did not need to make that much investment at all, because their taxable income is either low, or may not even be taxable at all. It is crucial to understand that the new age salary structures have many components. Your CTC (cost to company) is not your taxable income.

All these mistakes are committed in the rush of the March-end tax-saving spree. Unfortunately, it turns out to be a loss-making proposition for many people. Hence, it is important that you start your tax planning right now when you are neither rushed nor stressed to save tax.

Do remember to save your money, not just your taxes!!

12 Apr 2014
Best tax saving investment for young investors, like for your earning child

Best tax saving investment for young investors, like for your earning child

When it comes to investments made for the purpose of tax savings under Section 80C of Income Tax Act, Public Provident Fund (PPF), Life Insurance premiums and Equity Linked Savings Schemes (ELSS), which are basically Equity Mutual Fund, are among the most popular choices, especially for young investors. However, as far as wealth creation is concerned, there is simply no comparison between ELSS and the rest of the 80C investment options. It is often seen that, when we compare different investments, we are influenced by personal opinions, either our own or that of others. However, objective comparison should always be based on actual data. In this article we will see how much wealth could have been created in the last 15 years by investing in ELSS compared to other popular choices. Why have we chosen a time horizon of 15 years? The term of one of the most popular tax saving investments, PPF, is 15 years. Hence it is appropriate to choose duration of 15 years when comparing ELSS with PPF. For our analysis we have assumed an annual investment of  Rs70,000 in FY 2000 – 2001,  Rs100,000 from FY 2001 – 2002 to FY 2013 – 2014 and  Rs150,000 in FY 2014 – 2015, as per Section 80C limits for the respective years.


What would your maturity amount be if you invested in PPF

Before we deep dive into the analysis, it suffices to say that PPF is one of the best fixed income investment choices under Section 80C. The tax treatment of PPF makes the returns more attractive relative to other fixed income investments under Section 80C (like NSC, PO time deposits, tax saving fixed deposits) except ELSS. Even when compared to historical returns of traditional life insurance policies, PPF returns are higher. The chart below shows the PPF returns since FY 2000 – 2001.What would your maturity amount be if you invested in PPF

Let us now see how much maturity amount one would have accumulated in the last 15 years by investing upto the maximum 80C investment limit in PPF. The chart below shows the cumulative deposit amount and value of the investment in PPF.Investment In ppf

The blue line shows the cumulative deposits made by the investor in his or her PPF account every year. The total deposit made by the investor is  Rs15,20,000 ( 15.2 lacs) over the duration of the PPF. The red line shows the value of the PPF account, inclusive of accrued interest. The maturity amount of the investor is about   Rs29,82,000 (around  29.8 lacs).

What would your maturity amount have been if you invested in ELSS

investment in ELSS - humfauji.in


For the ELSS investment we have chosen at random a tax saver fund which has completed more than 15 years. For purpose of this analysis, we have selected HDFC Tax Saver Fund (Growth Option). Like in the previous example, let us now see how much corpus one would have accumulated in the last 15 years by investing upto the maximum 80C investment limit in the ELSS fund. The chart below shows the cumulative investment amount and value of the investment in ELSS.

The blue line shows the cumulative deposits made by the investor in the ELSS fund every year. The total investment made by the investor from 2000 – 2015, is   Rs15,20,000 ( 15.2 lacs), the same amount deposited in PPF in the previous example. The orange line shows the value of the ELSS investment based on prevailing NAVs. As we can see from the chart above, the ELSS returns are of a very different order of magnitude compared to PPF. In fact, the current value of the first two ELSS investments made in 2000 and 2001 itself is much more than the total maturity amount accumulated in PPF in the previous example. The value of the ELSS investment as on Apr 2, 2015 is over   Rs1.15 crores, nearly four times the PPF maturity amount.


Fund selection plays an important role in getting better investment returns


As discussed earlier, we chose HDFC Tax Saver fund at random from ELSS funds which completed 15 years. However, the HDFC Tax Saver fund has been underperforming relative to its peers for the past few years. The ELSS investor could have got even better returns than in the above example, by monitoring his investment portfolio from time to time and shifting to better performing funds. For example, if in 2010, the investor switched to Franklin India Taxshield fund, which was one of the better performing ELSS funds back then and even now, and continued to make 80C investments in the Franklin India Taxshield fund, the accumulated investment value of the investor would be over   Rs1.3 crores. This means that, through portfolio reviews and better fund selection, the investor could have got 13% higher returns over 5 years. There can be a number of other possibilities through which the investor could have got better returns. We have just shown an example of why it is important that, investors should do review their portfolio from time to time and make appropriate adjustments to get better returns. Investors should seek the advice of their financial advisors from time to time, to make necessary adjustments to their portfolio, as and when required.

Is ELSS better than NPS?

The only 80C investment option that has the potential to give returns somewhat comparable to ELSS is the National Pension Scheme (NPS). In this budget the Government has provided additional tax savings for investment in NPS. Investors can get an additional tax benefit of   Rs50,000 over and above the 80C limit of   Rs1.5 lacs, under Section 80CCD by investing in NPS. This makes NPS an attractive investment option for tax payers. However, a major disadvantage of NPS versus ELSS is the tax treatment on maturity. While capital gains in ELSS are tax free, NPS maturity amount is taxable on withdrawal. The other problem is that, under the current rules, 40% of the NPS maturity amount must compulsorily be used to purchase annuities and the annuity income is taxable. There are also limits on equity allocations in NPS, which younger investors may find too conservative relative to their risk profile. However, NPS has certain advantages too. The fund management cost of NPS is lower than that of ELSS. While we will not get into a comprehensive evaluation of NPS in the article, it suffices to say that, pros and cons notwithstanding, NPS is also a good investment option for younger investors, though with many restrictions and tax-inefficiencies on the corpus finally created.

Our Final Take

ELSS, or Tax Saving  Mutual Funds, are the very best way to save tax under Section 80C due to their tremendous wealth creation potential, flexibility, a very small lock-in and track record. Further, to get the best out of them, as the new financial year has just started, one should do choose the Systematic Investment Plan (SIP) route so as to minimise the equity market volatilities and avoid a lump sum outgo. To know more about mutual funds and how they can create real wealth for you, see this link at our website: https://humfauji.in/mutual-funds-can-be-your-financial-supermarket/


(Source: Dwaipayan Bose, www.advisorkhoj.com, 8th Apr 2015)

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