Every year we celebrate 1st April as April Fool’s Day, just for fun, trying to fool around with friends and playing pranks. Also, when it comes to investing, April feels more relaxed than other months, especially the previous three months, i.e., January, February and March.
Given the annual investment trends in the country, these three months see more money flowing into tax-saving investments than the entire nine remaining together. Be it ELSS mutual funds or life insurance plans, it seems as if suddenly there’s an influx of interest in these schemes during January, February and March.
The month of April, however, has seen a net withdrawal from the tax-saving investments at times.
This trend of investment and withdrawal sounds more like April Fool’s Day investment decisions. It seems like a majority of the investors trying to fool the Taxman and not give much thought to their own financial goals.
This kind of last-minute investing for saving taxes has major long-term consequences on your finances. Such as:
Investing anywhere only to save tax and without a definite long-term goal will mostly lead to one or more of these consequences. The reasons for these risks are simple:
Let’s look at this kind of investing in numbers. Assuming your age is below 60 years and your taxable income is Rs. 12 lakhs in this financial year, your maximum tax bracket is going to be 30%. Also, if you use every investment option available to minimize your tax outflow your money will look something like this:
|Your Money||Govt's Tax|
|Total Taxable Income||12,00,000||1,72,500*|
|Total Investment Under Section 80C (Life Insurance, ELSS, PPF, etc.)||1,50,000|
|Total Investment U/S 80CCD(1B) NPS Contribution||50,000|
|Total Spend U/S 80D (Health Insurance Premium for Family & Parents)||75,000|
|Total Tax Saving Investment/Spend||2,75,000|
|Net Taxable Income||9,25,000||97,500@|
|Total Benefit Received as Tax Saving||75,000|
* without tax-saving investments @ with maximum tax-saving investments
So, to reduce your tax liability by Rs. 75,000, you are risking Rs. 275,000. Even mathematically, investing just to save taxes in the present year’s income does not seem a wise decision.
Thus, why should you simply not invest in tax saving plans in the current year?
Although it was probably not a lot, you also lost a big chunk of your income to tax. So, you would probably want to take it easy in April and for the next few months and splurge.
However, smart investors will have certain advantages you are missing out on by investing only for tax-saving. Change is not easy, even if it is something like switching from April Fool’s method of saving tax to the April Smart method. However, you should bear this pain for the following reasons:
The short answer is, ‘by starting your tax-saving investments in April.’ However, if you are not doing that already, you will find it harder than it sounds. After all, you just invested almost your entire monthly income so that you can save tax.
The smartest way of going about being a smart investor is by prioritising your goals over tax-saving. You simply need to select tax-saving investments as per your financial and investment goals, even if it is only to accumulate wealth.
So, here’s a list of common financial goals and the tax-saving investments you can use to achieve them:
|Financial Goal||Investment Options||Maturity/ Lock-in Period|
|Family’s long-term financial safety||• Term Insurance Plan (80C)
• Health Insurance Plan (80D)
• Critical Health Insurance Cover (80C/80D)
• Personal Accidental Cover
|Up to 80 years|
|Wealth Building & Retirement Goals||• New/National Pension Scheme (NPS) (80CCD)
• Public Provident Fund (PPF) (80CCC)
• Unit Linked Insurance Plan (ULIPs) (80C)
• Deferred Annuity Plans from life insurers (80C)
|• Up to the age of 60 years
• 15 years with withdrawal lock-in for 5 years
• Up to 80 years with a lock-in of 5 years
• The vesting age could be up to 80 years
|Child’s Higher Education & Marriage Goals||• Guaranteed Income Plans from life insurers (80C)
• Unit Linked Insurance Plan (ULIP) (80C)
• Public Provident Fund (PPF) (80C)
• Equity Linked Saving Scheme (ELSS) (80C)
|• Up to 30 years
• Up to 80 years with a lock-in of 5 years
• 15 years
• 3 years lock-in only
Another thing about smart tax-saving is that you should know a little more about the tools of saving taxes, which may help you in planning your financial goals accordingly. Let’s take a look at the tax-saving investment options that are available:
Term Insurance Plans
If you are 30 years old, term insurance will save you between Rs. 10,000 to 20,000 under Section 80C.
Health or Mediclaim Insurance
You can reduce your taxable income by up to Rs. 75,000 (Rs. 25,000 for self and family + Rs. 50,000 for parents) every year with the two health plans.
Unit Linked Insurance Plans or ULIPs
You can reduce your taxable income up to Rs 1.5 lakhs in a year with ULIPs.
You can invest up to Rs. 2.5 lakhs in ULIPs in a financial year (w.e.f. 1st Feb 2021) for a tax-free maturity value.
Guaranteed Savings Plan
You can reduce your taxable income by up to Rs. 1.5 lakh in a financial year under Section 80C with this investment
Hopefully, this information would be sufficient to initiate you onto the path of being a smart investor.