Your tax-saving investments must be in sync with your larger financial plan

Experts say the primary mantra investors should follow is to make sure their tax-saving investments are in sync with their overall financial goals
If you're a company employee, your accounts department will, most likely in the first or second week of February, ask for proof of tax-saving investments made during the financial year. Ideally, you should have begun investing to save tax right from April of this financial year. But if you haven't, it is still not too late. But you must give a lot of thought, or take the help of a financial advisor, when choosing your tax-saving instruments. Insurance agents and bank relationship managers go all out to garner sales during these three months. The products they push are likely to be the ones that earn them the highest commissions, not those that are best for you, so you need to be careful while selecting your investments.

Experts say the primary mantra investors should follow is to make sure their tax-saving investments are in sync with their overall financial goals. “At the outset, every individual must identify his financial goals—short-, medium- and long-term. Once this has been done, combine investments with the objective of tax saving according to your risk appetite,” says Archit Gupta, founder and CEO, Cleartax.  

Check your insurance needs first: To ensure that the family’s financial goals and lifestyle aren't affected by the breadwinner’s early demise, it is imperative to buy adequate life insurance. Any person who has financial dependants (like parents, siblings, spouse or children) or liabilities (home loan, car loan, etc) must buy adequate term insurance to ring-fence his finances. Use a Human Life Value calculator available online to estimate how much life insurance you need. Or ask an advisor. Deduction is available on insurance premiums under Section 80C. Don’t buy an insurance-cum-investment plan to meet your protection need as the coverage they offer is likely to be inadequate.

Next, check whether you have adequate health insurance to take care of your family’s hospitalisation needs. In metros, a Rs 10-lakh family floater is a must, while in smaller towns, Rs5 lakh may suffice for a nuclear family. “Those who are not senior citizens get deduction on health insurance premium up to Rs 25,000 under Section 80D. Senior citizens get up to Rs 50,000. If you pay your parents' health insurance premium, you can claim a total deduction of up to Rs 75,000,” says Deepesh Raghaw, founder,, a Sebi-registered investment advisor.  

Invest according to asset allocation: Next, check the asset allocation of your existing portfolio to see where there is a deficit. “If your portfolio has become underweight on equities, consider a product like equity-linked savings scheme (ELSS),” says Renu Maheshwari, Sebi-registered investment advisor, and co-founder and principal advisor, Finscholarz Wealth Managers. On the other hand, if your portfolio is underweight on debt, consider Voluntary Provident Fund (VPF). You can invest up to 100 per cent of basic salary plus dearness allowance in it. It offers the same interest rate as Employees Provident Fund (EPF)—8.65 per cent currently. Another attractive instrument on the debt side is Public Provident Fund (PPF), which at present pays an interest rate of 7.9 per cent. Senior citizens can also opt for the Senior Citizens Savings Scheme (SCSS), which comes with government guarantee and offers an interest rate of 8.6 per cent.

Check investment horizon and liquidity needs: Your tax-saving investments must also be in sync with your investment horizon. If you have a time period of seven years or more, you may invest in a pure equity product like ELSS. The longer investment horizon will help you tide over interim volatility and garner good returns.  

Also pay heed to when you will need the money you are putting into these instruments. For instance, if you need the money in the short term, it wouldn't be a good idea to invest it in a unit-linked investment plan (Ulip). The earliest you can withdraw your money from them is after five years. EPF/VPF and PPF are also long-term, relatively illiquid products that offer limited access to your money in the interim. In EPF/VPF, you get a part of your money only under a specified set of circumstances—in case of grave illness, for child's education or marriage, etc. ELSS comes with the shortest compulsory lock-in of just three years.

Invest according to risk appetite: If you are a conservative investor who can't stomach the volatility of equities, you will be better off opting for a debt or hybrid product. The National Pension System (NPS) is one product that allows investors to choose from varying levels of equity and debt. “Those who want to invest towards retirement and have some equity exposure may consider NPS,” says Gupta. Maheshwari recommends investing in NPS to avail of the additional tax deduction of Rs 50,000 under Section 80CCD(1B).  

Steer clear of most insurance-cum-investment products: Many taxpayers delay their tax-saving investments till the last moment. Then they approach their neighbourhood insurance agent. More often than not, the product they get sold is a traditional insurance plan such as moneyback, whole life, or endowment plan. There are several issues with these products. One, they have an insurance component. “If you already have adequate insurance, or do not need insurance, you will unnecessarily pay the mortality charge on these products. Moreover, the mortality charge is higher for people who are older,” says Raghaw. With a part of your premium going into paying mortality charges, returns from these products come down. Moreover, they invest mostly in bonds. Due to these reasons, their returns rarely exceed 4-5 per cent. "If you're investing for the long-term, say, for 25-30 years, then you should ideally invest in an equity product that will offer you double-digit returns. Returns from insurance-cum-investment products are low. That can make all the difference between whether you retire rich or poor," says Maheshwari. Exiting these products can be expensive.

Tax savers you may opt for
Instrument Return (%) Taxation
10.76* 80C benefit. Gains above Rs 1 lakh in a year taxable at 10% 
Voluntary Provident Fund 8.65 80C benefit. Returns are tax free
Senior Citizens Savings Scheme 8.6 80C benefit. Interest income taxable at slab rate
Public Provident Fund
7.9 80C benefit. Returns are tax free 
NPS-tier 1-equity** 9.84-10.40 60% of corpus at maturity is tax-free. 40% must be used to buy annuity, income from which is taxable at slab rate
NPS-tier 1- corporate debt
NPS-tier 1- government debt 9.15-9.63  
*Category average return over past 10 years. **NPS returns for all three categories are from for past 10 years

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