Zero risk tool for Tax saving ... + Wealth Creation Tips to beat inflation

Basics of the PPF (Public Provident Fund) : Here we look at how PPF must be viewed in conjunction with your portfolio. 

It has the potential to give exponential returns over time, but it requires patience. Also, the larger the amount you invest, the greater the impact of compounding. 

After all, 7% on Rs 1,50,000 gives you much more than 7% on Rs 500. Now look at this cumulative impact over 15 years.

 

1) Let compounding work for you.

Though the PPF has a duration of 15 years, the first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters. So, if you opened the account on September 15, 2020, the 15-year tenure will commence from the end of FY2020-21 (March 31, 2021). That means it would have matured on March 31, 2036. Let’s say you invested Rs 1.50 lakh on September 15, 2020 and since then, Rs 1.50 lakh every single financial year on April 1. Over these 16 years, you would have invested Rs 24 lakh. At present on a return of approx. 7% per annum, it would amount to over Rs 49 lakh on maturity.  

This entire lumpsum is tax free. All the interest earned is also tax free. 

This forced saving (mandatory amount every year ranging from Rs 500 to Rs 1,50,000) makes it an excellent long-term savings tool. This tool is used for my retirement savings. If you have a little child, maybe you can position it as a savings for the child’s higher education. Whatever be the goal, have a long-term perspective in mind.

 

2) Make it work in your favour.

The money in your PPF account is compounded annually and credited to your account at the end of the financial year. The interest is computed monthly. It is calculated on the lowest amount between the 5th of the month, and the last day of the month. So to let the principle of compounding work on your behalf, deposit the entire amount – Rs 1.50 lakh before the fifth of April, every single year. Of course, the exact amount you will invest is a personal choice. If you are not able to afford a lump-sum, the PPF allows you to invest in installments. Try and put your money before the 5th of the month.

 

3) Use it as part of your debt allocation.

Over the weekend, a family member informed me that the cumulative amount in the PPF accounts of her and her husband totaled around Rs 80 lakh. She was really happy about it. This is a couple who does not understand debt funds but was looking for a safe, long-term fixed return investment. They decided to opt for this PPF. They also decided to extend it on maturity till they really needed the money post retirement. A colleague who is a fund analyst told me that the PPF has no place in his portfolio because the debt allocation is taken care of by debt mutual funds. He has various other ways of reaching the Section 80C limit of Rs 1,50,000 (interest paid on home loan, tuition fees of children, life insurance premium and contribution to Employee Provident Fund). On the other hand, though I invest in debt funds, I use the PPF as part of my debt asset allocation and invest in it every single year.

 

4) Be objective.

It may not be for you. If you are contributing to EPF and VPF, you could bypass the PPF. A friend of mine, who is a government employee. He said that by 2040, he should have Rs 1.2 crore in his General Provident Fund and Rs 20 lakh as gratuity. He will also be getting a pension of Rs 80,000 per month. In his case, a PPF would not help but investing in an equity linked savings scheme, or

 

ELSS, would be a better tax investment

 

Let us take a case of a consultant/entrepreneur : In his entire career spanning 22 years, only three were as a salaried individual. For him, cash flow was not a given, as it would be in the case of an individual earning a monthly salary. He saw no point in locking up money for an extremely long duration which could not be easily accessed. Another investor pointed out that PPF made sense at one point in his life. But now his contribution to the EPF and VPF and insurance premiums have enabled him to max the Section 80C limit. So once the account matured, he opted out of it. When I asked some of my colleagues if they have a PPF account, almost all who I approached admitted to having one, though their levels of enthusiasm and commitment to parking Rs 1.5 lakh per annum were mixed. I view PPF as a great debt product which is high on safety and super tax benefits. 

Think about it, putting away money for 15 years with a guaranteed return that is tax-free and risk-free. Who would not want to opt for it? But being a great product does not imply that it is a natural fit in any portfolio. Does it find a strategic place in your portfolio? Does it fit in with your financial plan? 

If yes, Go for it. 

 

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Dozen most common tax saving mistakes. Must read

It's Financial year end ... March approaching. ..Don't commit these Tax saving mistakes however tempting.. Be financially literate.

You are trying to save tax at last moment. An Insurance Agent in the guise of investment advisor calls you, asks for appointment. You are in last minute hurry.... You listen to him/her shortly and handover a cheque immediately.

The less tax you pay, the more disposable income in your hands. That is good enough reason to take your tax saving exercise seriously. But all too often, it is a mad rush to meet our March 31 deadline. And in doing so, we make some grievous errors by padding our portfolio with investments that could be well avoided.

Here’s how to sidestep that trap laid by cunning insurance advisors. Remember this is a landmine.

1.  Not exhausting all the tax saving avenues.  

The investments in Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year fixed deposits with the bank or post office, Equity Linked Savings Schemes (ELSS), Senior Citizen Savings Scheme (SCSS), National Pension Scheme (NPS), and Sukanya Samriddhi (specifically for the girl child) all fall under Section 80C. Certain expenses also fall under this section. Do cover all in your checklist.

Do not forget that you get a benefit when you pay rent. Also, interest paid on home loans qualify.

Look at Section 80CCC (included under the Section 80C limit), which includes the money spent on the purchase of a new policy or payments made towards renewal or continuation of an existing policy. The primary condition for availing this exemption is that the policy for which the money has been spent must be providing a pension or a periodical annuity.

Section 80D allows a deduction up to Rs 25,000 for medical insurance premium installments. The premium should be for you, your spouse, and dependent children.

2. One product approach

If one looks at tax saving as a cumbersome exercise to be gotten rid of at the end of the financial year, then there is a high likelihood of investing the entire eligible amount in one investment vehicle without considering one’s financial goals and risk appetite.

3. Section 80C is only about investing 

Section 80C allows you to claim a deduction of up to Rs 1.5 lakh of your total income under this section. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income.

All the investments mentioned above fall under this umbrella.

But Section 80C also includes tax-deductible expenses. Payment of life insurance premium and tuition fees for children are two expenses you must look at. The third expense is the repayment of the principal amount of a home loan. This deduction is also applicable on stamp duty, registration fees and transfer expenses. 

4. Insurance premium up to Rs 1.50 lakh can be claimed as a deduction.

The annual premium paid for life insurance is available for a deduction ONLY if the policy is in the name of:

• Taxpayer
• Taxpayer’s spouse
• Taxpayer’s children

The limit for the deduction is restricted to 20% of capital sum assured in respect of policies issued on or before March 31, 2012, and 10% in case of policies issued on or after April 1, 2012.

In case of policies taken on or after April 1, 2013, in the name of any person suffering from a disability or severe disability referred to in section 80U or suffering from disease or ailment as given in section 80DDB, the limit will be 15% of capital sum assured. Read more on this on the Income Tax website.

5. Buying endowment insurance plans

Endowment plans are a mix insurance and investment and tend to be costlier than term plans. Further, returns on endowment policies are low and cost structure relatively less transparent which undermines its utility as an investment vehicle. Since it’s a bundled product, insurance cover provided by it is lower and results in inadequate cover. Instead, it is advisable to buy term insurance with adequate coverage considering your age, income, dependents and existing wealth.

Investing too much in endowment plans : When you walk in to a Bank or ask your insurance agent for tax saving schemes they always recommend endowment life insurance plans since they earn highest commission @ 35% of first year premium and 5% on subsequent year premiums, hence they tend to convince you by hook or crook as if they are the only well wishers of you in the world. 

6. Lack of awareness about multi-year commitments

Certain products like ULIPs, endowment insurance plans etc involve multi-year commitments. Any failure to pay premiums in subsequent years results in revocation of the policy. Investors, at times, are unaware about this aspect. 

Note: These plans are of very long term usually in the range of 10 to 20 years hence you need to keep investing. If you redeem or fail to pay regular premium you are doomed. You will not even get your initial investment back. It is Win - Loose situation. Because if you redeem or lapse policy Company will be in profit.. Agent will be in profit.. A classic example - most of the insurance companies have thousands of lapsed policies. Ultimately the remaining amount is appropriated in their profits after mandatory period. Hence they are least bothered about follow up with custmer, besides formal reminders.

Even if you pay premiums religiously, till policy term. At maturity average returns will not be more than 6% to 7%

7. All tuition fees are permitted.

When the word tuition is used, it is the fee paid for a full-time course to any school, college, university or educational institute situated in India. It is not private, out-of-school tuition. Neither is it for fees paid abroad. The caveat being that it is limited to two children only.

8. Tax-saving investments are a must.

NO.

• First, look at the expenses permitted under Section 80C: principal home loans payments, life insurance premiums and children’s tuition fees.
• If you have not maxed the Rs 1.50 lakh limit with the above payments, then move on to check your provident fund contribution under EPF.
• Only if you still have not hit the Rs 1.50 lakh limit under Section 80C, should you consider any other investment (such as PPF, NSC, ELSS or 5-year bank deposits) to save tax.

Contributions to the Employee Provident Fund (EPF) are covered under the Section 80C limit. This is a retirement benefit scheme that is available to salaried employees; 12% of basic salary is deducted by an employer and deposited in the EPF. Your provident fund contribution accumulated over the current financial year itself might add up to a sizeable amount.

This is all the more relevant in the case of Voluntary Provident Fund (VPF). Here, the contributor decides on the amount of fixed contribution that is made towards the scheme on a monthly basis. Under the VPF, employees are allowed to make contributions towards their provident fund account on a voluntary basis. The scheme does not include the mandatory 12% that the employee makes towards the EPF.

9. Tax saving is about fixed-return instruments.

The SCSS, 5-year bank deposits, NSC and PPF are all fixed-return investments. But under the tax-saving umbrella, there are also ULIPs, ELSS, and the NPS, all of which provide an equity exposure.

This is why you must always approach tax planning from the perspective of your overall portfolio. Your personal tax strategy will have a different meaning and emphasis depending upon your circumstances and risk capability. For instance, if your portfolio is heavily tilted towards fixed income instruments, it would not be wise to opt for an investment in NSC. 

10. Shying away from equity

Ignoring lock-in period : Investments in ULIPs, PPF, endowment policies have longer lock in period as compared to ELSS. Ignoring lock in period of tax saving investments can throw your financial plan into disarray

Thinking solely about tax saving without thinking about wealth creation : Tax-saving investments which save tax and have an element of investment are supposed to create wealth. As simple as this statement may sound, this fact is lost on most investors, which they should be mindful.

Although equities are volatile in short term, they yield higher returns in the long term and outperform other asset classes. Shying away from equities hampers your ability to generate adequate wealth in the long run. Since ELSS returns are impacted by volatility in equities, it is advisable to invest in ELSS (Equity Linked Saving Scheme) through the SIP route to benefit from rupee cost averaging. So, consider an ELSS.

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11. Viewing tax planning in isolation.

Good tax management (saving and investing) can go a long way toward enhancing your return. But the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion.

Most individuals rarely think about tax planning from an investment point of view. Hence one finds that they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up investments that will give them the tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.

As a result, it is not surprising to see portfolios heavily skewed towards ULIPs or endowment plans. Or probably packed with NSC, in addition to their EPF and PPF. Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.

• When selling an investment, ask: What are the tax consequences?
• When buying an investment, ask: What are the portfolio consequences/impact of this current addition? 
  

Not thinking beyond 80C : Apart from 80C, there are other sections like Section 80D (Mediclaim), Section 80G (Donations to charitable organization), and Section 80CCD (National Pension Scheme), which taxpayers are usually unaware of. They should, therefore, try to make the most of them to save tax.

While you may have missed the bus when it comes to planning your tax-saving investments in advance for this financial year, you can certainly avoid these common mistakes by putting some thought into this and avoid regrettable investing decisions

12. Tax saving is a last minute exercise.

If you are doing your tax planning now, this is a mistake you have already made. Do rectify this going ahead.

You should invest in PPF at the very start of the financial year to avail of the benefit of compounding. If investing in an ELSS, it is wise to do so via a systematic investment plan (SIP) from April onwards. Do remember that SIPs are implemented for a minimum of 6 months or 12 months (though you can terminate it anytime).

You are most prone to making the wrong investment when it is done in a tearing hurry, with the March 31 deadline looming menacingly. Plan. If you want your money to work towards one goal, which is creating wealth, ensure that you approach it in an orderly fashion.

Your investment plan must be proactive, not reactive. By this I mean that tax saving should be in sync with the overall strategy and not a hurried exercise at the fag end of the financial year, where you pick up anything simply because you don’t know what else to do. Tax optimisation of individual financial products has to be the last step in the overall financial plan and not the basis for selection.

Using contingency funds for tax-saving investments : The last-minute investments to save taxes put pressure on the finances of many individuals, especially those who have just started their career. In an effort to make the most of tax deductions, people commit a cardinal mistake of using their contingency funds for this purpose.

From Next Financial year start it from April itself. Buy Life insurance for Protection not for saving Tax.

For this start SIP in ELSS for long term and create wealth along-with tax saving.

 Visit and open E-Wealth Account today.

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