Tax Saving On Your Mind? Here’s What You Need To Do
As we near the end of FY ‘22, a lot of you will be waking up to the need to put away up to Rs. 1.5 Lakhs in a Section 80(C) qualified instrument. After factoring in your home loan, PPF, term insurance premiums and children’s school fees, if any, you may still be falling short of the 1.5 Lakh mark. If that’s the case, here’s the best course of action for you to take right now.
Avoid ULIP’s and Traditional Plans
Life Insurance is (sadly) often mis-sold in our country – especially during the frenzied sales push that “JFM” brings about. Unfortunately, it is also “mis-bought” by many clients, who often commit moneys to these policies for tax saving purposes alone. Endowment Plans (also called “traditional Plans” or “non-linked” plans) make for very poor investments as well as risk transfer tools, as they deliver anything from 4 per cent to 6 per cent annualised returns, and provide only a thin sliver of life coverage. ULIP’s have become somewhat better after reforms in 2010, but still have relatively high costs inbuilt into them. If you’ve got such policies running already, sit down with a Financial Planner and discuss your options for surrendering them or making them paid up.
Underinsured? Take up a Term Plan
If you’ve got financial dependents to support, its vitally important that you have an appropriate amount of term life cover against your name. As a thumb rule, you need to have at least 15 to 20 times your net annual income as your life cover. If you’ve been committing funds to insurance plans with the intent of “investing” rather than “transferring risk”, you may find yourself coming up woefully short when it comes to your life cover number. Taking up a Term Plan earlier on in your life makes more financial sense, as your overall premiums will be lower. Your Term Insurance premiums (excluding the GST amount) are fully tax deductible under Section 80C. For most people, the annual premium should range from Rs. 8,000 to Rs. 25,000 or so. This should help cover some of your Section 80(C) gap.
Go for an ELSS – but break it up
Despite all the pandemic induced tumult, ELSS (Equity Linked Savings Funds) have managed to deliver 5 year annualized returns of 14.62 per cent and 10 year returns of 15.73 per cent (as of 30th Jan ’22). With their short lock in period (3 years) and scope for delivering superior long-term returns by harnessing the power of the equity markets, ELSS (Equity Linked Savings Scheme) Mutual Funds make a lot of sense, especially if you’re young and can afford to take more risks and have a longer investment time horizon than the stipulated 3 years. As a category, ELSS Funds tend to outperform broad indices such as the NIFTY by at least 2 per cent to 4 per cent per annum, over medium to long term time frames. Having said that, it’s important to note that ELSS Funds are high risk investments, and therefore not suitable for investors who are completely intolerant to volatility. With today’s rich valuations and extreme volatility, it would be sensible to break up your target ELSS investment amount into eight weekly tranches from now until 31st March using SIP’s (Systematic Investment Plans) or STP’s (Systematic Transfer Plans), instead of making a lump sum investment.
