The date today is March 30, 2016. Normally, it is expected that by this time the tax savings for the year would be done and over.
However, the reality is very different. Based on the emails and comments I have received, it seems that some of us are still far from it, desperately searching for “last-minute tax saving tips”.
In this desperate attempt to “do something“, wrong investment products are being invested into which can make your portfolio suffer for a very long time.
Why wrong? Because they are not understood. The ultimate goal that will be served by those investments is not considered. There is only one thing driving the decision now – save tax.
Read more: 15 point checklist to save taxes smartly
Here is an example. Manish, a Chartered Accountant, works in the taxation department of an MNC. It is a well paying job. Though working for a few years now, he has not been able to save any money so far, for various reasons. This year he decided to put some money to work. He told his father about it who got him to meet his insurance agent.
You know where is this going, right? The agent got him to buy 3 policies one of which was a Pension Plan and the other was a Guaranteed Future Income Plan. And he had to pay only for 5 years, the typical sales bait for insurance policies.
The illustrative maturity figures for the policy looked huge – 60 lacs, 20 lacs, etc. There was of course no attention paid to the rate of return.
That’s not a lone case. Yet another software engineer, who has “no time to study the markets and do it by himself“, gave Rs. 2 lacs cheque as a premium to Dhan Vriddhi ULIP. The premium has to be paid annually.
Both of them realised in time that something was not right and sought advice.
So, here is tip no. 1 for this year.
Tax-saving tips #1 – Avoid insurance + investment
Simply avoid any insurance based investments including ULIPs, Pension Plans, Endowments or Money Backs. Don’t hesitate to say NO.
In case you have gone ahead and made that investment in March itself, you still have recourse.
After the receipt of the policy document, you have upto 15 days to have a free look at the policy and return it, if that is what you were not looking for. Use that free look-in period, return the policy immediately and get your money back. It is your hard earned money. Do not waste it.
How should you do it? Just call the customer care of the company and in a calm voice announce your decision. There will be no deduction when you return during this 15 day period.
When it comes to insurance, you have to buy Term Plan for Life Insurance and Mediclaim for Health Insurance. That’s it.
Tax-saving tips #2 – Don’t overload debt in your portfolio
Just because a PPF, NSC or a 5 year Bank FD can give you a tax-benefit, don’t rush to invest in them. Every single investment you make has to help you meet your financial goals. Will investing in PPF, NSC or 5 year Bank FD help you fulfil your goals? You have to realise that they are debt investments and they will grow at their pace.
I know it might be too late to do such an analysis but here is a quick tip. If you are in the 30s, you can afford to take on a lot more chances than what you will be 10 or 20 years hence.
Your investments have to be geared more towards equity than debt. How much should that be, is personal, based on your goals.
Do you have zero equity or equity mutual funds in your portfolio? The next tip is for you.
Tax-saving tips #3 – Use the power of equity
If you have plans for retirement which is still 20 to 30 years away, you need not hesitate from taking exposure to equity. That too when an investment brings you an immediate tax benefit plus no taxes when you sell or withdraw your investment.
Yes, I am talking about tax-saving mutual funds or ELSS. You can read more about them in this post. There are some ideas on how to select an ELSS and some options you can consider for investing.
If you have zero equity in your portfolio, this is an opportunity you can use to introduce yourself to it via tax-saving mutual funds.
And it is super easy. Most mutual funds accept applications online on their websites with almost zero paper work.
Use the power of equity to build your long term wealth and reach your financial goals, faster.
I also realise that lack of understanding and knowledge about investment options becomes a big hindrance in making the right investment decisions. It is never too late to seek advice, but not from sellers. Seek out an investment advisor who is not interested in selling a product to you.
Still have questions? Ask.
Between you and me: Where do you stand on tax savings for this year? What did you do to save tax? Any other last minute tips you would like to share?
Hi Vipin
Saw your article in ET 31st mar’16 regarding NPS. A good guidance for new investors. Here I would like to comment that you could also illustrate another big aspect while comparing between the investments in NPS and Equity MF as explained below.
On maturity of NPS at the age of 60 years, the market may pass thru’ a bear phase. Therefore, annuity principal will be a lesser amount. There is no flexibility to extend the maturity period to enable encashment of NPS units in a bull market. In comparison, the equity MF gives full flexibity in this regard. This is a big difference to take care of market cyclical.
However, NPS has a different advantage with a min. 50% debt component giving a better capital protection, though may not be attractive for aggressive investors.
Would like to be in touch with you.
Thanks and Regards
Jayanta Nandi
Mechanical Engineer by profession with L&T as a JGM but has a keen personal interest in investment finance.
Dear Jayanta, thanks for reading and the comment.
You mention a valid point. However, withdrawal from NPS can be deferred in a way that you take 10% minimum every year.
But again, that’s just a fact. More reasons to avoid it.
Surely, be in touch. Would like to know more about your learnings, investment strategy, etc.