Don't invest in haste

There are a number of instruments that qualify for tax deduction under Section 80C. Choose according to your age.

Investing in instruments under Section 80C is often done in haste. Reason: A big part of the Rs 1 lakh deduction is covered by the employee provident fund (EPF). Consequently, the remaining amount is put in other instruments.

No wonder many find themselves stuck with unit-linked insurance and pension plans they do not need. “Even if the aim is to save tax, the investment should be done keeping asset allocation and age in mind. It should be in conjunction with other investments,” said Brijesh Dalmia, a certified financial planner.

For starters, there are two types of tax deduction instruments — investment-oriented and non-investment oriented. Investment-oriented instruments include

EPF, Public Provident Fund (PPF), National Saving Certificates (NSC), bank deposits of over five years, unit-linked life insurance, and equity-linked saving schemes (ELSS).

The non-investment ones include home loan principal and interest, children’s school and college fees, health policies, and life insurance term plans.

Most investment-linked savings qualify for deductions under Section 80C. Others qualify for deductions under various heads such as Section 24 (home loan interest repayment) and Section 80E (health insurance).

Here is how one can go about investing according to his age and maintain asset allocation.

Age 21-30: Most people in this age group are single and have few or no dependents. This means they do not need any substantial life insurance cover. The focus, therefore, should be on returns.

People in this age group can put all their money in ELSS, which primarily invest in stocks. EPF takes care of the debt portion as employees contribute 12 per cent of their basic salary to this fund. This means they can have 10-30 per cent of the total investment (of Rs 1 lakh permitted under Section 80C) in equities depending on their basic salary. The three-year lock-in ensures long-term savings.

Age 31-40: Most salaried in this age group are married with small children. There could be additional liabilities like house and car loans. As liabilities increase, the first thing to do is to buy adequate life insurance (through a term plan) that can take care of dependants’ expenses and your liabilities in case of death.

In case of a home loan, the principal repayment is added to Section 80C deductions. If there’s a shortfall even after insurance premium, EPF and the principal payment of housing loan, invest in an ELSS.

Age 41-50: Taxpayers in this group are close to the peak of their careers. They have grown-up children. By now, regular investments should have ensured a corpus. In these years, pre-pay your home loans. The income tax department allows deduction for this.

“At this point, re-evaluate your life cover needs. If liabilities have decreased, you can lower the sum insured. In case the liabilities still loom large, buy adequate insurance,” said Malhar Majumder, a certified financial planner.

“Don’t ignore the medical insurance benefit available under Section 80E. By this stage, a person should have a medicalim policy,” said Dalmia. He says the taxpayer in this age group should buy a health cover over and above what his employer offers, which is not applicable after retirement. Medical insurance will ensure that health-related emergencies do not erode wealth.

“If a person has to choose between health and life covers, we ask him to first get adequate health cover,” Dalmia said.

Age 50-60: The main aim should be to create a corpus for regular income in the future. At the same time, investments should not have volatility risk. Ideally, invest in a lot of debt. One should preferably look at PPF as returns from this scheme are tax-free.

Age 60 and above: The top priorities for people in this age group are regular income and capital preservation. If there are enough funds, one can look at investing a small portion in equities to beat inflation.

For regular income, the elderly should invest in Senior Citizen’s Savings Scheme. It is a long-term fixed deposit and, hence, eligible for deduction under Section 80C. A small portion of the entire corpus, around 10-15 per cent, can be invested in ELSS to beat inflation. But, this should be considered only after securing regular income.