For many people, their first experience with investing is through tax planning. After all, who doesn’t want to save taxes?
But before deciding on what instrument to invest in you should first decide on your investing strategy. There are many ways to save taxes through exemptions and deductions in the old tax regime under section 80C. The list is exhaustive and can get overwhelming for many new investors. This also means that there is a lot of choice available– from mutual funds to insurance to pensions funds and more.
This choice gives you the opportunity to be far more strategic about your tax planning. Rather than chasing a tax saving product because everyone else is doing it, you should first think about what product to invest in based on the financial goal you are trying to achieve. The tax benefits should then just be an added bonus.
Each instrument has pros and cons – and this is driven by how the product is structured.
For example, a PPF is a long term debt product. The returns therefore will always be in line with fixed income and there is a lock in period
On the other hand an ELSS is a purely market linked product and therefore, in theory, equity returns should be higher over time but that is not assured.
The NPS is purely a pension product to provide social security in retirement. However it is linked to the investors retirement age and therefore has a very long lock in period.
And similarly each product that is eligible for tax savings has different benefits including term and health insurance.
With so much choice available, you should think hard about the merits of investing in a particular scheme and how it fits into your financial plan.
For example, if an investor is primarily invested in equities, they might find that taking a debt-linked product can improve their risk-return profile. If an investor knows that they will be tempted to draw down from their investments for spending purposes, they may feel that a product with a longer lock in can help them avoid that temptation.
There is one product that is broadly applicable for everyone and that is health insurance. Section 80D allows for tax deductions against total taxable income against premiums of health insurance. This is much needed protection that each of us require, no matter the financial situation, from the high costs of medical procedures. And, the need for health insurance has never been more clear in light of the continuing COVID pandemic.
To understand a little bit more about how much tax you can save from your investments, check out our YouTube video on planning your taxes