Don't invest to save tax

Choose products that suit your profile and needs

Rajiv Goel, chief executive, Bombay Capital Services, gets quite exasperated with clients.

"We keep reminding them to plan in advance," he says, "else they risk upsetting their near-future plans. But, most don't do so for tax-filing — and take incorrect decisions in haste."

With March-end approaching fast, there is a strong likelihood that marketers of financial products will assail you with SMSes and calls, offering you solutions to resolve tax problems. The staring gap (deficit) between declared and actual investments may want to make you spend a quick buck on an insurance plan or a mutual fund, just to avoid that cut in salary. But remember, you will need to service this product (in terms of annual payments made) for a long, long time.

According to the Income Tax Act, you can save Rs 1 lakh under Section 80C and Rs 35,000 (Rs 15,000 for self and Rs 20,000 for senior citizens) under Section 80D. The disabled can save Rs 40,000-60,000 under Section 80DD and 80DDB. While the latter can be claimed only if family members are suffering, the former two are where taxpayers end up spending without discretion.

For instance, a health insurance buy shouldn't be just for tax-saving. In medical insurance, it is important to pick the right product, suited to the policyholder's age and extended family. "For senior citizens, they usually go for small cover, as the only consideration is the tax slab. Medical cost for the elderly, however, can be much higher and limiting their cover is unfair," says Akshay Mehrotra, chief marketing officer at policybazaar.com. Consider: A seven-day hospitalisation owing to a heart attack can cost around Rs 4 lakh.

Employees may also opt for medical insurance from companies. These cover parents as well. In the last year, many firms introduced the co-pay method. It works out cheaper than a standalone policy. Other options include top-ups that come into play only after the base policy has been exhausted.

Under Section 80C, there are a plethora of options — life insurance policies, fees for children's education (the entire amount up to Rs 1 lakh), principal payment for home loan, Employee Provident Fund (EPF) and New Pension Scheme, among others.

For most employees, EPF should take care of the major part of Section 80C. If, however, you fall short, there are many options still. "We suggest individuals to invest in instruments they really need and not just to save tax. Instead of an Ulip, we suggest an equity-linked saving scheme (cheaper in annualised payments and has a lock-in period to save for the longer term)," says Sumeet Vaid, founder and chief executive of Freedom financial planners. If a person is young — and with no dependents — he could go for a basic mediclaim. This is in contrast to a person with a family. He should pick a policy with a mix of critical illness and accident cover. Moral of the story: Buy what you need, and not just to save tax.

Save more through NPS, but ...

An employer can put up to 10 per cent of an employee's basic salary in the New Pension Scheme (NPC) under the new Section 80CCD(2). Savings under this will be over and above the Rs 1-lakh 80C limit. Under NPS, a person in the age group of 18-55 can open an account with a minimum investment of Rs 6,000 a year.

Depending on the investor’s choice, the NPS fund manager will put in money in equities and debt. For the most aggressive, 50 per cent of the money will be invested in equities through index funds and the rest in debt.