The month of March is the month of tax saving! Come March, and then we see a scramble to save tax with ELSS ( Equity Linked Savings Scheme ). Almost every other person who has just completed an investment becomes a tax expert and starts advising others on how to save tax. Brokers, particularly agents selling Insurance policies, go all out and make a killing as Insurance companies set higher targets for the month of March. After all, big money has to be saved! I have seen Chartered Accountants “advising” clients to buy NSCs of Rs.1,50,000 on the last day of the year, as there is no time to calculate how much is to be invested. This is justified saying that anyway, it is an investment and there is no harm in it. This kind of logic appeals to our senses and those with financial resources often fall for it.
1. How Much to Invest?
Money has a price tag. If you keep money, say Rs.100, at home and not in a Savings bank account, you may not see the loss, but you are incurring a loss as money kept in the bank would grow to a slightly higher amount, say Rs.104, in a year’s time. Similarly, investment in a scheme with lower returns or investing an amount that is more than required implies you are incurring this cost. Hence, it is important to first calculate the amount that you need to invest to save tax.
Let us understand that there are two main sections, 80C and 80CCD, under which Investments made in specified schemes are eligible for deduction from your taxable income. 80CCD pertains to NPS, which is a separate topic in itself and needs a separate blog. The confusion that I was talking about largely pertains to investments/ expenses falling under Section 80C, under which a maximum amount of Rs.1,50,000 is allowed as deduction. If at all you are a person who is short of money and is looking for the minimum amount to be invested to avail of the maximum tax benefit under Section 80C, you need to first calculate how much is to be invested.
We have understood that the maximum amount to be invested is Rs.1,50,000. If you are a salaried employee, some amount must be getting deducted every month towards contribution to Employee Provident Fund. This amount must be deducted from Rs.1,50,000. If you have taken up life insurance policies, any premium paid on such policies can be deducted. If you have taken a home loan, the amount paid towards the principal component of the EMI can be deducted. If you have paid tuition fee for your children, such tuition fee can be deducted. If you already have a PPF account or if you are investing in Sukanya Samriddhi Scheme, then contributions to these schemes can be deducted. After deducting all these payments from Rs.150,000, if still some balance is left, then that is the amount you need to invest to save tax.
2. Where to Invest?
In my opinion, purely from a tax saving perspective, ELSS is the best vehicle for investing your “scarce” money. The primary reason is that ELSS has a lock in of only 3 years, whereas all other choices under Section 80C have longer lock in periods. This does not mean you should invest in ELSS only for 3 years. 3 years is a very short period and investment in Equities for short periods is always risky. What I am hinting at is that you invest in ELSS with a long term horizon, say 15 years, but every 3 years, you redeem the ELSS investment and make a fresh investment in the same or another ELSS. This way, on the same amount, you will be claiming tax exemption 5 times in 15 years. You can do the same thing with 5 year FD but you get the benefit only 3 times in 15 years. Same is the case with other investments which have a longer lock in period. For example, PPF will have lock in of 15 years for investment made in the first year. Thus, shorter lock in enables investors to get more tax benefits with same money over a longer period of time.
Apart from the higher post tax return on account of lower lock-in, Equity as an asset class has the potential to earn highest returns over any other comparable tax saving product. However, if someone is looking to invest ONLY for 3 years as she wants the money back in 3 years, then ELSS is not the right choice as equity markets can be turbulent and might actually earn lower or negative returns during the period. Investments in equities should always be made for a long term. Ideally, long term is 10 years.
3. How to Invest in ELSS (Equity Linked Savings Scheme) ?
Often, gullible investors are lured into investing in sub-optimal investment schemes such as ULIPs mainly because they are unaware of the investment process and the agent/ broker is seen as the friendly guy who does all the running around and “gets their job done”. This is a fallacy, as one is not only choosing the wrong product, but is also paying hefty commissions year after year for a one time service. What if, there is no running around and you can complete your investments in ELSS at the click of a mouse in the comfort of your home/ office at any time of the day or night?
Just log on to www.jama.co.in and Register yourself. Investments upto Rs.50,000 can be done for free. No charges, No commissions, no nothing. ABSOLUTELY, UNCONDITIONALLY Free! If you are investing more than Rs.50,000, then subscribe to the silver plan, which costs a mere Rs.499 per annum (plus GST). Once you have logged in, see the menu on the left hand side. Under MUTUAL FUNDS, you will see a scissor icon reading Tax Saver Funds. Just click on it. You will see our recommendations, which have been selected through a complex algorithm, without any bias towards any fund or fundhouse. Just decide on any one of the picks there and click on the Invest now button. Enter the amount to be invested , check the “I agree” check box (after reading the terms and conditions and declarations), make the payment and you are done. No need of any agent to do the running around, as there is no running around. Still need help? Call our helpline. We would be happy to help!
Tax planning for the next year
Done with this year’s investment? Instead of going through the pressures every year in March, upgrade to our platinum plan. We will do your entire financial planning, including your tax planning, making tax savings a breeze.
Invest in ELSS to the extent required using the Jama platform. Upgrade to platinum for tax planning. Happy Investing!