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Investing foolishly to save tax? Read this

Last updated on: February 9, 2011 10:15 IST


Photographs: Rediff Archives Ushma Shah

This time round the year most salaried taxpayers are looking to invest with the objective of reducing their tax burden and to earn good returns along with tax benefits. Have you ever thought about returns on investments before parking your funds to avail the deductions under section 80 C of the Income Tax Act?

Before that you should know what are the instruments that are included under section 80 C.

These can be split into three categories:

Protection: Premiums paid for life insurance and pension plans

Loans: Prepayment of home loan principal amount

Investments: Employee Provident Fund, general Provident Fund, Public Provident Fund, National Saving Certificates, bank deposits, equity-linked saving schemes, senior citizens' savings schemes.

You can invest under section 80 C up to a limit of Rs 1 lakh hence it is important that you give a thought to it. Your planning should begin with insurance coverage for your life in case you have any dependants or a liability.

Once your insurance needs are taken care of you should look at your debts particularly home loan, by taking into account the loan repayment amount. If still you have not reached a total of Rs 1 lakh then you should go ahead for investing in tax savings instruments.

Before you start investing, your first priority should be towards your dependant's security, housing loans if taken and providing for contingency funds (provision for unforeseen expenses).

The author is senior research analyst with www.apnapaisa.com.

Apnapaisa is a price comparison engine that allows consumers in India Images the ability to compare the EMI, interest rates and other fees for home loans, car loans, personal loans, business loans, credit cards, compare online quotes and features of life insurance, health insurance, car insurance, travel insurance and other general insurance policies in India.

Investing foolishly to save tax? You need help


Your investments are dependent on your different life stage

1. Unmarried professionals

If you are young and have just started working, you can mobilise your money for achieving your goals like buying a flat, a car or accumulating funds for your marriage.

Incase you have dependants and liability to honour, you should go in for a term policy and claim the premium amount as deduction. As for the balance, most of the amount can be invested into an ELSS and some part in PPF.

As you are young, your risk bearing appetite can be high. As a thumb rule,  your current age minus 100 should be the percentage invested in to equity and equity related instruments.

Investing foolishly to save tax? You need help


Photographs: David Ball/Wikimedia Commons

2. Just married

As a newly married person, you will find a drastic change in your cash flow as you have responsibilities to fulfill.

In the next 5 to 6 years, you will have to start providing for your child's education along with many other liabilities. After adequate insurance you can invest into an ELSS scheme that has a lock in period of 3 years and after which, in case of any emergency, you have an option to redeem the funds, which can act as a liquidity option.

Investing in NSC also can act as a short-term goal for child's initial education fees as it matures in 6 years.

Investing foolishly to save tax? You need help


3. Married, having young children

At this stage after having adequate insurance, you need to start planning for your retirement, if you haven't started till now. You can buy a pension plan as they will give you income once you retire.

Along with retirement planning you have to allocate funds for your child's education and can get deductions against the tuition fees paid.

As you near your retirement, your equity exposure should reduce and focus should be on investing into safe and capital protection investments like ELSS and NSCs or bank fixed deposits.

Investing foolishly to save tax? You need help


4. Working professionals with grown up children

Accumulating for retirement is the first and most important thing at this stage. Insurance and home loans repayment would be secondary as home loan would be hardly for a few more years and life insurance would just continue for the remaining years.

You have to ensure that your children are financially independent by way of good education and career.

5. Pre-retirement phase

You can educate your children about with the importance of financial discipline, benefits of investing early and power of compounding as they start working. At this stage you should reduce your equity exposure in mutual funds and move towards investing into PPF, NSC or Bank FDs.

Investing foolishly to save tax? You need help


6.Post retirement

Now the time has come to enjoy the benefits of the investments you have made. Your PPF and pension plan's (corpus accumulated) amount can be invested in to SCSS and a part of it in to FDs after taking into account the applicable inflation rates.

This way all of you should invest prudently to take advantage of 80 C and thus reduce your tax liability. What's more these investments will ensure the financial independence till your lifetime.

Take the first step towards planning your finances prudently and don't just invest to save tax. Invest to earn better returns too!