In this article, let’s discuss some important points you need to consider before making tax-saving investments.
Often, people opt for the Old tax regime and invest in whatever scheme comes to their mind without giving much thought to it. While doing so, apart from tax savings you can also enjoy other benefits of investing i.e. Return, Safety and Commitment etc.
So let’s understand the factors which we need to consider before investing in the Tax saving investments.
Another important point before starting the topic is that irrespective of whether you are in Old scheme or a New scheme, it is highly recommended to have 1 Life insurance policy and 1 Health insurance policy.
If you are already holding these, you are on the right path. If not, consider to get them immediately as soon as possible. And consider buying them even if you are facing a liquidity crunch, because these policies will help in the long run if any risk arises in the future.
So coming back to the topic, for tax saving benefits people generally prefer the two major options. One is taking a Housing loan and the other one is Section 80C.
Let’s start and discuss about 80C first and we will talk about housing loans in the 4th point.
1. Choose your risk profile
For tax saving, Section 80C provides multiple options i.e. LIC policies, Tax saving FD, ELSS Mutual funds, NPS contribution, NSC bonds, etc. Choose one that is suitable for your risk profile among these multiple options.
Meaning, it’s up to you whether you invest in safe instruments or you want to take risks.? If you don’t want to take any risk, you may go with Tax-saving FD, LIC policies etc. Instead, if you want to take risks and get more returns, you may go for ELSS mutual funds. This is the first point you need to consider.
Remember while choosing so, you don’t need to invest all your money in a single investment option and exhaust the entire 80C Rs. 1.5 lakh limit. You can split the entire Rs. 1.5 lakh limit in multiple investment options available under 80C and invest in whatever proportion you want.
2. Return on Investment
The second point is Return on Investment. It is good that you are investing for tax benefits, but getting a decent return on your investment is also important, right?
So, consider tax-saving investments which yield better returns over others. The point is that every time you make a long-term investment, you may get a better return, but make sure you are financially ready for such long-term commitments. If you look at NPS or PPF for example, you have to invest continuously for 15 years, then the return from such investments is slightly better than short-tenure investments. But if you feel you can’t commit to such a long tenure (i.e. 15 years), then investing in either NSE bonds with lock-in for 5 years, Tax saving FDs or Mutual funds with lock-in for 3 years would be a better alternative.
So, also consider the Tenure of your investment while considering the Return on investment.
3. Explore various Investment opportunities and Safety
While considering some of the investment options, sometimes you are left with no options. For example, if you are considering investing in NSC certificates, you should buy only from the Post Office.
Whereas if you are thinking of investing in either ELSS or LIC policies, you can approach multiple players to buy. So whenever you have these kinds of multiple options for your investments, take your time to do some research and invest with such an agency/investment in which you feel safe.
4. Commitment
The last point is Commitment. Whatever investment you choose, think about how long you can commit to that investment.
Always Remember this, whenever you are considering investing in LIC policies for 15 years or a housing loan for 15-20 years ONLY for Tax savings. Because 15 years is a very long-term commitment. Investing in these long-term commitments may help you to save some tax but it is not so easy to continue such investment for 15 years.
Generally, for many people whenever they get more tax cuts, the first thought that comes to their mind is to save tax either by taking a Housing loan or an LIC policy.
That doesn’t mean you shouldn’t take a housing loan if you want to buy/construct a house, what I’m saying is that if you want to take a housing loan ONLY for the sake of saving taxes, think twice before you invest.
Conclusion
Saving tax outgo and managing your finances are two crucial things you need to balance. While doing so, please consider the above factors to get some extra advantage of the money you are investing.
And do remember, if you want to plan your investments properly, do it from the financial year beginning.
Hope you have enjoyed reading the article. Thank you for your time.
