It’s a rush every year to declare your investments, rechecking if the mutual fund you’ve invested in is deductible under Section 80C, calculating the principal amount of the home loan you are repaying, computing your LIC premium, not least of all, putting it all together on a sheet of paper and dashing it across to the HR department fervently hoping that your pay check doesn’t see a huge deduction for tax. It is one dreaded process every year, only second to the actually filing your returns. We could ease up the process by familiarising ourselves with the process and making smart investment decisions early on.
Here are two basic questions you need to know the answer to: What type of investment options do you have deductible under Section 80C and how can you choose the right ones?
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Obvious one: Life Insurance
For those not clued in, the premise of 80C is to encourage savings. So, the government offers tax breaks to certain types of financial products mentioned in 80C.
What this means is that Out of your total investments, if upto 1 lakh has been invested in any of the 80C listed products, you can claim these as tax deductible. So basically, all you need to do is look up if the investment is 80C deductible.
Of course, the oft found 80C investments are life insurance premiums, Provident fund and home loan principal but here are two main categories of investments for those interested in a wider investment portfolio. These are small savings schemes and Equity linked saving schemes.
Small savings schemes
Unlike its name, these have nothing to do with small savings. Perhaps, the name was deduced from the fact that these don’t fetch you the highest returns. Small savings schemes include PPF (Public Provident Fund) and NSC (National Saving Certificate. The returns on these are typically in the range of 8 percent or thereabouts. Another feature of small savings schemes is that these come in with a long lock-in period.
Basically, these schemes are intended at long term investments. The advantage here being that the returns from a PPF or NSC is assured, unlike when you trade in equity investments
Equity linked savings schemes
Fancy name apart, these schemes are nothing but mutual funds with tax benefits. The mutual funds operate much like regular MFs with no guarantee on returns, especially if there is a fall in stock prices.
The advantage here, being that these funds will naturally fetch you higher returns that too in a shorter span of time. Note though, these mutual funds come with a three-year lock-in period. Here too like regular mutual funds, you have funds investing in large cap, small cap and mid cap funds. The safe option, always, is to invest in a diversified fund, which will minimize the investment risk.
Distributing your 80C investments
Your main task is decide how you will distribute your Rs 1 lakh investments. The choices you make will largely depend on certain other important financial choices you’ve already made. For instance, most of us, even before we start earning have an LIC policy. Also, the investments will depend on whether you are repaying a home loan. These are existing obligations,
And the less obvious… stock markets
In the present scenario, stock markets investments seem a tad risky. At the same time investing in small savings scheme is not going to fetch a very impressive return. One factor driving your decision should be your age. If you are young investor starting out, you can afford to take a few risks, as retirement is still a fair few years ahead and you have plenty of time to plan.
A good option is to opt for SIPs (Systematic Investment Plans). These require you to invest a fixed amount every month and will fetch you good returns. Even the stock market, despite inflation and rising stock prices is a good option. Mainly because, there are some companies whose valuations look impressive and the stock prices of these are bound to rise in a couple of years. Of course, a large part of your investments will have to do with your risk appetite.
So what are you doing to shrink your Income Tax burden. Share with us your strategy on our Income Tax Messageboard.
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