Nirav Panchmatia's Blog

INVEST and therefore SAVE TAX and not vice versa…

Confused about the heading of this article…

What is the biggest mistake people commit in the month of March???
The first financial agent to knock on your door in March gets to sell any damn financial product to you.
Any damn financial product with any amount of commission and expenses?
And all his hefty commission and his company’s expenses go from whose pocket?
Obviously from your pocket…
So why do you commit this hara-kiri? (Hara-kiri is a Japanese term for Suicide done in a violent fashion)
Because of the following reasons:

  1. It is March and just like all previous years, you just could not manage to get hold of a good Financial Advisor who can help plan your tax saving investments (What, do you really think you do not need professional help to decide where to Invest that 1 lac every year?)
  2. Your CA had strictly instructed you last time to invest in some or the other financial product under sec 80C of The Income Tax Act if you want to save on taxes
  3. Since you have not planned anything and its fag end of March, the financial or commission agent who has come knocking at the door has been god sent. Or that’s what you think…

So, just like all previous years, you end up buying an unwanted, undesirable, expensive financial product not because you wanted to buy the same but because it is March and the Income Tax Act requires you to invest up to Rs. 1 lac each year to save tax….
And if it happens to be an Insurance product (which would be the case more often than not), then you have promised commitments for not only this year but for the next 5, 10 or even 15 years…
So you buy an insurance product and if you are very unlucky, the commission agent’s favourite insurance product, a Unit Linked Insurance Plan (ULIP) to save tax this year but knowingly or unknowingly you have bought an insurance plan on which you will have to pay hefty Insurance premium for the next 5 to 10 or even 15 years. And you are not even sure whether you need this product in the first place….

So what is the solution…?

Can I manage to teach you about the various Investment avenues available to us under Sec 80C of the Income Tax Act 1961 and help you to pick the right product for yourself?

Well, if you promise me that you will read this article properly and the links provided, I can at least attempt to make you understand the pros and cons of various tax saving avenues…

Well let us start then…

To begin with, since I have already written a lot on Tax Saving Investment previously, and since till date not much has changed in the Income Tax laws pertaining to Sec 80C, I would insist that you go through my previous articles on this subject by clicking on the links below:

Read the following 3 articles on my BLOG and return here:

No. Article Heading
1 Death and Taxes
2 4 Strong Reasons to Invest in Tax Saving Mutual Funds
3 Tax Saving Mutual Funds: Grab them with both hands

The first article, titled “Death & Taxes” helps you to break various Tax Planning Myths and introduces you to various Investing options available u/s 80C:
Tax planning myths
I invest only to save tax

I buy Insurance only because I need to save taxes

PPF / NSC are still the best tax planning instruments available

Unit Linked Insurance Plan’s (ULIPs) are good for tax planning & give great returns too

Rs. 100,000 is the maximum I can invest to save taxes

Repayment of loans do not qualify for any tax deduction

Tax planning needs to be done only at the end of the year around Jan-March

The right approach Tax planning investments have to be planned in a way that it helps you create WEALTH and in the process help you reduce your tax liability. Further, your risk taking capacity & asset allocation should decide what tax planning instrument you choose. Last minute rush to buy insurance or investing in PPF disregarding your actual needs is not the right approach towards tax planning. A good financial advisor can help you decide on the right tax planning instruments for you based on your financial goals.
The second article titled “4 Strong Reasons to Invest in Tax Saving Mutual Funds” introduces you to the merits of investing in Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS) as they are commonly known, which according to me, is one of the best tax saving investment available to us u/s 80C of The Income Tax Act…

Why, because it has following advantages…

Merits of Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS):

  1. Tax Saving Mutual Funds, also known as ELSS, have minimum lock-in period of 3 years compared to any other tax saving avenue; PPF has 6 yrs, NSC has 5 years, ULIP has 5 years, Bank FD has 5 years etc…
  2. It is one of the few marked-linked (investment in stock market) Investment avenue available under sec 80C and much better than the other market-linked product like ULIP
  3. You only have to Invest once in this product and there is no binding on you to continue investing for a few years in the future which is the case with practically all other Sec 80C products; what a relief! It works like a Single Premium insurance plan…
  4. It has amongst the best returns as returns are linked to market and over a longer time frame, Tax Saving Mutual Funds have usually given double digit returns, post tax, post expenses…
  5. Also, after the abolition of entry load on Mutual Funds, weft Sep 1, 2009, the commission on this product is zero and the expenses ratio is also minimal in the range of 1 to 2% per annum…
  6. Most important, the returns from Tax Saving Products are tax free….yes, the Long Term Capital Gains or ELSS is tax free as per the current law…

What more do you want from a Tax Saving Investment avenue?
No long term commitment, onetime payment only, zero commissions and minimal expenses, minimum lock-in period of 3 years and tax free double digit returns…
Well, you are a very greedy person, if you are demanding something more from a tax saving product then what an ELSS is already offering you…
Now, it is known that in the coming budget, The Income Tax Act 1961, in all probabilities will get replaced with the Direct Tax Code… if that happens, the tax planning game will change completely.
However, that will have effect next financial year (FY 2012-13) and will not have any impact whatsoever this financial year or your tax planning strategy for this year (FY 2011-12). Also, it is likely that this might be the last year for Tax Saving Mutual Funds or ELSS. In all likelihood, ELSS will cease to exist under the DTC regime. (Although I wish this should not happen). If that is the case, this is the last year when you can invest in this wonderful Investment & tax saving avenue…
So please grab Tax Saving Mutual Funds or ELSS with both hands and after Home Loan Principal amount and Term Insurance premier and PPF/EPF/GPF, every penny left u/s 80C out of Rs. 1 lac should go into ELSS or Tax Saving Mutual Funds…
Yes, one caveat here, there are more than 35 Tax Saving Mutual Funds or ELSS schemes out there in the market. And you should be investing in the top 1 or 2 schemes. Which are these?
Well, you have 2 options:

  1. Consult your Financial Advisor or Financial Planner (not the commission agent, I hope you know the difference by now) OR
  2. Read my BLOG regularly…

Plan your taxes wisely…

I am closing this article with Chanakya’s quote on Taxation…

According to Chanakya, “a King should collect Tax like a bee collects nectar from flower, without harming the flower and collecting only that much nectar from a flower as is necessary and without harming the flower so that it can come again to collect the nectar from the flower next season”…

Wise words from one of the wisest political minds India has seen…Hope our beloved pranab da is listening and has read Chanakya’s Arthashastra…


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