The financial year 2020-2021 has just ended, and we're in the beginning of the new 2021-22 financial year. The memories of last hour rush of making investments for Section 80C is still fresh in our minds. And these are certainly not very pleasant! How about planning for saving taxes well in the advance to avoid the avoid last minute mad rush and avoid the mistakes of wrong investments altogether? Let us discuss.
Items eligible for deduction
There are several items eligible for deductions u/s 80C, which can be divided into two broad categories. The first category comprising of various items investment products like Equity Linked Saving Schemes (ELSS), Public Provident Fund (PPF), Provident Fund((PF), National Saving Certificates (NSC), Deposits under Senior Citizen Savings Schemes (SCSS) and Tax saving FD, home loan repayment, Sukanya Smaridhi Scheme (SSS), etc. The second category comprises expenses items like life insurance premiums, education expenses for your child, etc. These can also be further divided into two sub categories - Mandatory items and iscretionary items.
Items like your annual life insurance premium, children’s school fee, contribution to employee provident fund and repayment of your housing loan, etc, fall in the mandatory category. In respect of school fee the aggregate amount likely to be spent can be fairly estimated in advance at the time of beginning of the year. So, it's a case of contribution towards your provident fund as well as repayment of home loan in case you have one running. Likewise, unless you intend to increase your life cover during the year, the amount of life insurance premium would also be known well in advance. Add up all these mandatory items to know the exact amount of mandatory items.
Once you have arrived at the aggregate of the mandatory items, you have a fair idea of how much discretion is available with you for investing in discretionary items. Since you don't have much control over the mandatory items, your choice is limited to the extent to discretionary items. There are several investments products which are available under the discretionary category. Which include items like tax saving FDs, PPF, NSC, ELSS and deposits under SCSS and SSS. The item or combination of the items to be selected would depend on various factors like your risk appetite, age and anticipated requirement of funds in the near future, etc.
Investment products like deposit under SCSS or tax saving FD, NSC, etc., come with a tenure of five years which offer you fixed return with almost no risk. However, for whom retirement is far away and can thus take some risk with their investments, ELSS offer better alternative which historically has given highest returns amongst all the products under Section 80 C.
Income in respect of other items of investments like tax saving FD, NSC and SSCS, etc., are taxable so the effective after tax return earned on these products are quite low than what is apparent. Though PPF and EPF still offer you a tax-free income, but then the money is locked for very long period and the returns still are very low. Looking at the significant reduction in the rates for the next quarter on government saving schemes announced on March 31, 2021, and in spite of the profits on ELSS getting taxed at flat 10 per cent beyond initial Rs 1 lakhs, the post-tax returns from ELSS still leaves a wide gap against other products.
Those who are young and have fair risk appetite with long-term investment horizon, can invest the discretionary amount arrived as above in ELSS. Since we are at the beginning of the year, you can spread projected investment throughout the year by investing equal amount through monthly SIP. With the help of investing in SIP, you are insulated from the volatility of the stock market. With SIP in ELSS you are able to reap the benefit of rupee cost averaging concept. This rupee cost averaging ensures that you buy more of the same when the price is low and vice versa.
Even for those who do not wish to invest in ELSS can still prepare a budget for investing in other products and adhere to it to avoid last minute rush and avoid cash crunch of March.
Get your acts together and plan your investments for the purpose of Section 80 C benefits after taking into account the mandatory items. Listing of mandatory items will ensure that you do not land up investing more than what is needed so your cash flow is not unduly stressed. While arriving at the figure of Rs1.50 lakh, please take into account the contribution which you are planning to make towards you pension plan, National Pension System (NPS) and PPF account.
-The writer is a tax and investment expert and can be reached at firstname.lastname@example.org