Latest articles on Life Insurance, Non-life Insurance, Mutual Funds, Bonds, Small Saving Schemes and Personal Finance to help you make well-informed money decisions.
Life insurance not the best bet
Hemant Rustag, CEO, Wise Invest Advisors
Investing to save taxes should be an integral part of one’s overall investment plan as it can contribute significantly to the process of achieving long-term investment goals. However, certain myths often cloud the choices of investors which makes them compromise on what they achieve from tax-saving investments. Here are some of the myths:
Many taxpayers consider life insurance to be their best bet for saving taxes and end up investing in multiple investment-cum-insurance products, making them compromise on the quantum of risk cover on their lives as well as what they earn, thereby putting financial future of dependents at risk in case of an unfortunate event.
Then there are those who consider investing in potentially better market-linked products like ELSS and NPS to be a risky proposition and hence prefer to invest only in safer options like PPF, fixed deposits and NSC, thereby compromising on return. Besides, investors have the habit of investing at the fag end of the financial year in a haphazard manner as they undermine the need to plan for their tax-savings investments at the last moment.
This can be tackled by separating insurance and investment needs and following a disciplined investment approach. While a pure risk product like a term plan can ensure adequate risk cover, allocating a part of tax savings investment through an SIP in ELSS brings discipline in the form of putting some money aside every month, reducing the risk of volatility as well as improving portfolio returns.
Last-minute planning not ideal
Ankur Maheshwari, CEO, Equirus Wealth Management
With the change of the calendar year, besides New Year wishes, professionals are also greeted with an email from their HR department with regard to submission of tax investment proofs. Most of us would have engaged in at least one discussion with our colleagues or family evaluating tax-savings instruments. We believe that there are two important considerations to keep in mind.
Timing: The most common mistake that investors commit is to invest in tax-saving instruments only towards the end of the financial year. Owing to the paucity of time, investors then end up making hurried decisions. It is advisable to plan well in advance. For example, if you are choosing to invest in PPF, then do as early as possible in the financial year to maximise interest income, while for ELSS you could average out at different points in time during the financial year.
Product suitability: Many times investors view products as stand-alone tax-saving investments and do not consider how they fit in overall portfolio requirement or asset allocation. Given that there are a plethora of products available, investors should evaluate product features in detail such as capital protection, risk versus return, lock-in period, and so on, and not just the tax-saving aspect. For example, in the life insurance products category, Ulips are very different from traditional or term insurance plans.
All MFs do not give tax benefit
C.S.Sudheer, CEO and Founder, IndianMoney.com
There are several myths around investments used to save taxes. Here are some of them.
Putting money in life insurance gives tax benefit and is also a good investment: People invest in endowment plans or Ulips to save tax under Section 80C. Note the word “invest". Insurance is protection from risk and can never be an investment. You are better off availing term life insurance which is cover against pure risk. Mixing insurance and investment is a bad way of saving tax. Look at other tax-saving alternatives which offer higher returns, post tax.
All mutual funds give tax benefits: This is not true. Only equity-linked savings scheme or ELSS, a type of equity mutual fund with a lock-in period of three years, gives this benefit.
All fixed deposits are taxable or tax-free: The truth is interest income earned from fixed deposit, post office savings account and recurring deposit are taxed. Another common myth is there’s no need to pay tax on interest earned from a bank fixed deposit as the bank has already deducted tax at source. This is not true. There could be tax liabilities depending on income earned. If your annual income is ₹8 lakh and you earn ₹30,000 interest on the fixed deposit, the bank deducts 10% tax at source which is ₹3,000. You fall in the higher tax bracket of 20% and must pay an additional ₹3,000 each year.
Investors miss the big picture
Rajesh Cheruvu, Chief Investment Officer, WGC Wealth
Broad categories with different lock-ins: guaranteed benefit schemes, bank deposits and market-linked schemes. Tax exemption stages: on investment (as deduction), accrual or maturity. Guaranteed benefit schemes offer conservative inflation-adjusted (real) returns prevailing at the time of investment with 5-15 years’ lock-ins ranging from NSC to PPF. Bank FDs offer prevailing interest rate with 5 years lock-in to regular tax savers and senior citizens who can only avail of interim liquidity with a penalty. Market-linked savings are either ELSS with a three-year lock-in or NPS where 25% withdrawal is permitted for certain life events. They offer access to listed equities, corporate debt and government securities with allocations depending on the investor’s risk profile.
Investors narrowly focus on saving tax today and ignore the bigger opportunity offered by this investment class. Being long-term investments, exposure to long-tenured assets like equities should be opted for. FDs fail to capture nominal inflation trajectories. Secondly, investors’ preference to fixed benefit plans has a long history of higher returns and a lack of options. Now that fixed rates are inflation-linked, past experience of high yields could be behind as RBI has also adopted an inflation targeting policy. Investors should invest systematically in ELSS or NPS versus investing a lump sum to benefit from averaging. Tax savings encourage long-term thrift, but it is up to investors to optimise allocations to maximise yield.
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