Why 80C tax-saving needs planning

As the financial year end nears, a lot of you may be in a hurry to make tax saving investments. Company deadlines to submit proofs may also be on your mind. All this means, you might just end up finding some scheme that qualifies for deduction. But if you realise the amount of your total income that goes into saving taxes, you would pay more attention to where you are investing, rather than finding the first option to save tax. In this regard, here are a few things that you need to keep in mind.

1. It grows into a substantial amount of corpus

Majority of the investments that qualify for tax-saving come under 80C section of the income tax act. This currently has an upper limit of Rs.150,000 but this limit has changed over the years. An additional deduction of Rs.50,000 invested in NPS was introduced in 2017. Keeping that aside for now, if you had made use of the entire deduction that was available under 80C, you would have invested the following amounts.

We can see that you would have invested Rs.7 lakhs in the last 5 years and Rs.16 lakhs in the last 15 years if you had diligently exercised the tax saving option. If you were to invest this amount, wouldn’t you pay more attention to where you are investing?

2. Weighing your options

You have a range of options that help you save taxes. From PPF, a debt product with a lock-in of 15 years, to ELSS mutual funds, an equity product with a lock-in of 3 years, they vary significantly. Post office schemes, life insurance schemes, bank deposits, the choices just don’t end. Some post office schemes are for specific purposes like Sukanya Samriddhi account for welfare of daughters and Senior Citizens Savings Scheme specially benefitting people over 60 years of age. But when all you worry about in the month of March is to pay lesser taxes, you may not sit down to fully understand your choices.

What you need to do is to evaluate your options keeping in mind the use for the money. Shortest lock-in period of 3 years in ELSS may sound attractive if you’re the kind who is averse to keeping money locked. But ELSS being an equity product requires a higher risk appetite and a longer time frame. On the other extreme, if you take comfort in the guaranteed interest of PPF, you also need to remember that it is locked-in for 15 full years. Try and understand your existing allocation, if you’re already overboard on debt and want to build wealth, ELSS investments would be appropriate. On the other hand, if you have enough equity exposure, you should consider lower risk bank FDs, PPF and post office schemes.

If you have very little life cover, then term insurance should be your first option. But then, trying to mix that with investing by taking a unit linked cover (ULIP), gives you very little life cover and also ends up with enormous premium that is not fully invested either. So here, you should know where you need to separate a risk cover from an investment.

3. Lock-in period is not maturity period

ELSS funds are often opted for because of their short lock-in period. But it should not be treated like an FD with a maturity period of three years. Like all equity investments, longer you stay invested, the more your money compounds. The only reason you should redeem your investments should be because you require the money or you want to switch it to a low risk alternative.

We saw how much money gets accumulated because of tax saving investments. To illustrate how much it can grow to, assume the money was invested in an equity index Nifty 50. The table shows what the final corpus would be if you had stayed invested for different periods.

An investment of Rs.16 lakhs would have grown to Rs.35.24 lakhs in the last 15 years if you didn’t redeem at all. This is the same time period you would have locked-in with a PPF. And that would have given you Rs.29.37 lakhs. We can see how a longer time frame in equity results in an enormous amount of difference in the end corpus.

In summary, if you handle your tax saving investments like your other investments, you can more just than save tax. In fact, the amount of taxes you save will look insignificant relative to how much your investments can grow to.