The Best Way To Save Tax AND Create Wealth
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01 Oct, 2018
With the due date of 30 September for filing Income Tax Returns extended, many tax payers who had left all their work for the last minute are breathing a sigh of relief. These are the same people who scramble to invest in ‘tax-saving instruments’ come February and March that results in ad hoc investments in various products that cost too much, yield little and are a drain on the overall portfolio.
For most people tax-saving is more of a burden they are forcefully bearing rather than being a delightful way of saving and investing. It is important to not view tax-saving as an isolated goal while selecting your investments. The truth is, with a little thought and planning the investments you make for tax-saving can become an asset for life by adding on to your retirement corpus.
Before we delve into investments and growing your retirement corpus, let’s check how much of your 80C/D deductions may already have been taken care of:
- Life and health insurance: If you are paying premiums for life insurance, then you can claim deduction for the premium under section 80C. We recommend taking a Term Cover that will take care of your dependents and pay off the liabilities, after you, without involving high premium and inadequate insurance.
In addition to 80C deductions, your health insurance premiums give you a deduction of up to Rs 25,000 under section 80D. If you are paying for your parents’ health cover, that gives you an additional deduction of Rs 25,000. For senior citizens the limit is Rs 30,000.
- Claim tuition fee and education loan benefit:If you have school-going children, their tuition fee will account for a good part of the Rs 1.5 lakh deduction. Have you taken a higher education loan for yourself/spouse/child? Claim deduction on the interest without any limits for 8 years of repayment, under section 80E.
- Tax benefit of a home loan:Do you intend to buy a house or are you paying EMIs on your house? The principal part of home loan EMI is eligible for 80C deduction and the interest is deductible under Section 24.
- Don’t forget the EPF deduction:As a corporate professional, at least Rs 21,600 of your Rs 1.5 lakh deduction allowed under section 80C is taken care of by EPF (self-contribution).
After considering all these if there is still leeway to claim deductions under 80C, then you need to think about where you can invest your money and at the same time reduce your tax.
National Pension Scheme (NPS), Unit Linked Insurance Plans (ULIPs) and Equity Linked Saving Schemes (ELSS) are some of the options that come in mind to save tax. While the NPS is not a good way to plan for retirement income due to concerns of low returns and taxation, ULIPs have high inbuilt costs that eventually eat into your return and offer low flexibility and liquidity. That leaves us with ELSS. These equity mutual funds with tax benefits, give you the unique opportunity to create wealth while saving on tax. While ELSS schemes have a lock-in period of 3 years, it is still less than the lock-in period of 5 years or more that all the other options under Section 80C have. This is your chance to save tax and simultaneously build your retirement corpus.
Let’s view how your tax-saving investment in different instruments can grow over time. Say you have identified that based on your current lifestyle you need a corpus of Rs 11 crore for retirement and you wish to invest Rs 5,000 monthly (Rs 60000 yearly) in LIC/PPF/ELSS, this is how your money will grow depending on what age you start investing –
|Current Age||Age of Retirement||Yearly Investment (Rs)||LIC (Rs)||PPF (Rs)||ELSS (Rs)|
|25||60||60000||0.70 Crore||1.13 Crore||5.42 Crore|
|30||60||60000||0.50 Crore||0.74 Crore||2.75 Crore|
|35||60||60000||0.33 Crore||0.45 Crore||1.24 Crore|
|40||60||60000||0.23 Crore||0.30 Crore||0.67 Crore|
Thus, if you start investing wisely at the age of 30 with just Rs 5,000 per month in ELSS, about 25% of your retirement target can be achieved! That’s two birds in one shot – tax saving and building your retirement corpus. Start off even earlier at age 25 and your investment in ELSS will amount to Rs 5.42 crore, that’s 49% of your entire retirement corpus!
Therefore, while planning investments for saving tax, decide how the amount will be split between equity, insurance premiums, home loan and EPF so that you not only reduce your tax but also create wealth for your future needs. More importantly learn from the story you heard when you were a child – The Story of the Tortoise and the Hare. Slow and Steady wins the race – prepare like the Tortoise and start your tax-saving investments from well in advance and avoid scrambling towards the year end for meeting your tax-saving needs. We are in the third quarter of this financial year and if you haven’t planned the best way to save tax through investments then now is the good time to start.