Don't invest just to save tax but to get closer to your financial goals too

Choose an equity, debt or hybrid instrument depending on investment horizon and asset allocation

If you have not begun your tax-saving investments for the current year, do so right away. Leaving it entirely for the fourth quarter could lead to a cash crunch. While investing for tax saving, do so in a manner that allows you to remain in sync with your asset allocation, and helps you move closer to your financial goals.

Invest according to financial goals

Select suitable tax-saving instruments depending on whether your goals are long or short term. “Long-term goals can be those that you want to achieve in, say, 10 years or more, like children’s education, saving for retirement, etc. Short-term goals are those that have to fulfil in three to five years, like purchasing a car or a home,” says Archit Gupta, founder and chief executive officer (CEO), Clear.

For long-term goals, choose investments that entail risk but also offer higher returns. “Choose the equity option through Equity linked Savings Scheme (ELSS) which provides both tax saving and growth. If your goal is five years or less away, avoid volatility and go for instruments like National Savings Certificate (NSC) or five-year bank fixed deposit (FD). If you have dependants, buy term insurance,” says Pankaj Mathpal, founder and managing director, Optima Money Managers.

Buying term and health insurance is non-negotiable. The tax benefit on the premium paid only makes doing so more attractive.

Pay heed to risk appetite

Tax-saving instruments catering to investors with varied risk appetites are available. If you have low tolerance for volatility, opt for debt or retirement products. “An individual with a low risk appetite can invest in Public Provident Fund (PPF) or Voluntary Provident Fund (VPF), whereas one with a medium- to high-risk appetite can opt for National Pension System (NPS) or ELSS for the long term,” says Gupta.

ELSS combines the benefits of inflation-beating returns over the long term along with the lowest lock-in period among all tax-saving instruments. Moreover, its returns are taxable at 10 per cent only on long-term capital gains exceeding Rs 1 lakh in a year.

Keep asset allocation in mind

Ensure you are not over-invested in a single asset class as that would expose you to intolerably high risk. “When you prepare a long-term financial plan, you decide on an equity-to-debt ratio for your portfolio. Each year, when you invest for tax saving, opt for an ELSS fund if your equity allocation is low. On the other hand, if your debt allocation is falling short of the optimal level, opt for PPF, NSC or NPS,” says Parul Maheswari, a Mumbai-based certified financial planner.

Change as you age

As you age, you would have achieved some of your financial goals and would be close to achieving others. Your risk appetite would have gone down. Your tax-saving investments need to be tweaked accordingly. “By now you would already have adequate insurance. Your main objective now should be to save tax and avoid volatility,” says Mathpal.

If you have retired, your income would have declined and you would now belong to a lower tax bracket. Consider investing in Senior Citizens Savings Scheme (SCSS), which offers a return of 7.4 per cent, or NSC, which offers 6.8 per cent. Tax-saving fixed deposits are another option.

If your PPF account has completed 15 years, then extend it—with or without contribution. If you choose the with-contribution option, you can withdraw up to 60 per cent of the account balance on the date of extension over the next five years. If you extend without contribution, you can withdraw the balance in your account at the time of extension. In either case, you can withdraw once in a year.