Align tax-saving investments with financial goals and asset allocation

Making a start now will give you time to choose instruments prudently and avoid mis-selling

With about four months left in the financial year, it’s time for investors in the old tax regime to prioritise tax-saving investments. A survey done in July by Finnovate, a financial fitness platform, had found that 27 per cent of respondents had not done tax planning. Delaying it until the last moment can result in rushed decisions and missed opportunities. 

 

Starting early—by October or five months before the March 31 deadline—ensures a smoother and more strategic approach. “If you have not begun tax-saving investments, you are already late. But it is still better to act now rather than delay it further,” says Arvind Rao, founder, Arvind Rao & Associates. 

 

Early bird gets the worm, or advantages of starting early 

 

Having time allows taxpayers to take a considered decision regarding which tax regime to follow – new or old. “This is crucial. Only in the old tax regime do you get tax deductions on investments,” says Sujit Bangar, founder, TaxBuddy. 

 

For most people with an annual income below Rs 10 lakh, the new regime is likely to be beneficial, according to Rao. “Only if you expect total deductions to exceed Rs. 3.5 lakh does it make sense to stick to the old regime,” he says. 

 

Early planning also allows for thorough evaluation and judicious selection of tax-saving instruments. “Taxpayers can fully utilise deductions under sections like 80C and 80D,” says Mohit Gang, co-founder and chief executive officer, Moneyfront. 

 

Gang notes that the current market correction offers an opportunity to average out investments in equity-linked savings schemes (ELSS) over the next four months, instead of making lump sum contributions in February or March. 

Early tax planning also means taxpayers don’t face a cash crunch in the final quarter of the financial year. 

 

Negative consequences of late investing 

 

Leaving tax-saving investments for the last moment results in poor-quality decisions. “By investing in a rush at the last moment, you compromise on selecting the best tax-saving options,” says Renu Maheshwari, Sebi-registered investment adviser, Finscholarz. Taxpayers also risk falling prey to mis-selling. 

 

Investments tend to be ad hoc, and not strategic, in nature. “The pressure to meet deadlines can make you take decisions without adequately evaluating how your tax-saving investments align with your financial goals,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. 

 

Employers compute tax deducted at source (TDS) based on declared investments. “If investments are delayed, TDS may increase, reducing take-home salary,” says Suresh Surana, a Mumbai-based chartered accountant. 

 

How much do you need to invest? 

 

Evaluate the total amount that needs to be invested, review existing contributions, and then arrive at the additional investment you need to make this year. “Your investments must align with your asset allocation,” says Maheshwari. 

 

Contributions eligible for Section 80C deduction include Employees Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), National Pension System (NPS), unit linked insurance plans (Ulips), equity-linked savings schemes (ELSS), 5-year tax-saving fixed deposit (FD), Sukanya Samriddhi Yojana (SSY), Senior Citizens Savings Scheme (SCSS), tuition fees for up to two children, and home loan principal repayment. 

 

Gang suggests that besides investing Rs. 1.5 lakh under Section 80C, taxpayers must also take the benefit of deductions under sections like 80D (health insurance) and 80E (education loans). 

 

Don’t lose sight of long-term goals 

 

Tax-saving investments should support the taxpayer’s long-term financial objectives. “Define clear objectives such as retirement, children’s education, or wealth creation, and map investments accordingly,” says Surana. He recommends PPF and NPS for retirement, SSY for children-related goals like education and marriage, ELSS for higher returns, and life insurance for risk protection. 

 

PPF should be the preferred option for fixed-income allocation within long-term portfolios like retirement. “PPF offers triple tax benefits—exempt at the time of investment, during earning phase, and upon withdrawal,” says Maheshwari. 

 

In NPS, investors can choose an equity allocation (up to 75 per cent) that matches their risk appetite. “NPS is ideal for retirement planning as it allows equity exposure and offers an additional Rs. 50,000 tax deduction under Section 80CCD(1B),” says Maheshwari. 

 

ELSS is ideal for those with a long horizon and moderate-to-high risk appetite. “It is excellent for wealth creation, besides offering tax benefits,” says Dhawan. Investors should opt for a systematic investment plan (SIP) or systematic transfer plan (STPs) when investing in these funds to average out their cost of purchase of units. 

 

Beware that excessive focus on Section 80C can at times lead to overinvestment in low-return instruments like NSC or FDs. “This can crowd out investments needed for goals like retirement or emergencies,” says Surana. 

 

The key is to diversify investments based on life stage and risk tolerance. “Avoid over-allocating to products that lock funds unnecessarily. Regularly review your portfolio to adapt it to changing life circumstances and tax regulations,” says Bangar. 

 

What missteps can you avoid? 

 

Low-return instruments like traditional insurance plans—endowment or moneyback plans—should be avoided unless they meet a specific need. “They seem attractive for saving taxes, but returns rarely exceed 5–6 per cent,” says Rao. 

 

The investor may not even get adequate protection. “Moneyback policies, with low returns of  4–6 per cent and high premiums, often lack adequate insurance coverage,” says Surana. 

 

Examine the cost before you buy a product. “High-cost options like Ulips, if not thoroughly evaluated, can result in suboptimal gains,” says Bangar. 

 

Ulips also involve a lock-in period of five years, making them less liquid than the combination of mutual funds and term insurance. They also lack flexibility. “Your insurance needs might change, but you can’t do anything about it if you are in a product with a lock-in,” says Dhawan. 

 

Tax-Saving FDs come with a five-year lock-in, and interest from them is fully taxable. “Effective returns are low compared to inflation, and liquidity is restricted,” says Surana. 

 

Tax-saving options for retirees 

 

Retirees need to synchronise their tax-saving strategies with their life stage. “If retirees have taxable income in the higher brackets, it makes sense to invest up to Rs. 1.5 lakh under Section 80C. But they should avoid dipping into the retirement corpus solely to save tax,” says Maheshwari. 

 

Gang recommends ELSS, tax-free bonds, and SCSS for senior citizens. ELSS offers the potential for higher returns with a three-year lock-in. According to Bangar, retirees should avoid this high-risk equity instrument unless they have the risk appetite and financial cushion. 

 

SCSS is a secure, government-backed option that offers regular income. “Though SCSS is not tax-exempt, it remains one of the best schemes for senior citizens due to its attractive interest rate (8.2 per cent) and safety,” says Gang. 

 

Note that in Budget 2024 the government raised the employer contribution to NPS. “It was raised to 14 per cent of basic salary from the previous 10 per cent, offering greater tax deferment benefit,” says Dhawan.   

TAX-SAVING INSTRUMENTS TO CONSIDER 

Public Provident Fund   

Long-term investment with a 15-year tenure 

 

Benefits: Tax-free interest, sovereign guarantee, 80C benefit 

 

Equity Linked Savings Scheme 

 

Market-linked instrument with 3-year lock-in 

 

Benefits: Potential for high returns, 80C deduction, persification 

 

Voluntary Provident Fund 

 

Extension of EPF with high interest (8.25 per cent) 

 

Benefits: Tax-free interest, risk-free, ideal for salaried inpiduals 

 

National Pension System 

 

Tier I provides tax breaks under 80C and 80CCD(1B) 

 

Benefits: Flexibility in equity allocation, additional deduction of Rs. 50,000, and retirement security 

 

(Source: TaxBuddy) 

  (The writer is a Mumbai-based independent financial journalist)