Tax saving investments can help achieve goals
Cleartax.in 20-07-2016 10:56:14 AM
Term plan gives you pure insurance whereas others are a mix of insurance and investment
Tax-saving investments are long-term investments by nature. This is one of the reasons why they make excellent investments, because the lock-in periods force the investor to stay invested and earn from the power of compounding. This is why saving taxes shouldn’t be the only purpose behind investing in tax-saving investments.
Tax-saving investments can help you achieve your financial goals like a child’s education or wedding, a house purchase or a trip abroad. You can even use tax-saving investments to plan for your own retirement. Staying invested for long periods of times means you keep adding to your portfolio gradually and it grows into a sizeable corpus, especially when the power of compounding kicks in.
But not all tax-saving investments are same and one size doesn’t fit all when investing for goals. Different goals require investments in different types of tax-saving avenues. Long-term goals should have higher exposure to investments that have an equity exposure. Here is where ELSS funds can come in handy. Equity is the only asset class that has the potential to generate inflation-beating returns. But equity can also be volatile. The stock markets tend to be turbulent and a bear phase can result in the value of investments going down suddenly. This is why equity is one of the best suited for long-term goals. When the investment goal is 10 year away or more, then you can comfortably ride out the volatility that comes with equity. This is what makes ELSS funds one of the best tax-saving investment that can be used to achieve goals like a child’s education or wedding or one’s own retirement.
For short-term goals, fixed income investments like tax-saving fixed deposits would be best. These FDs have a lock-in period of 5 years and also earn the investor a tax break under Section 80C the Indian Income tax laws (“ITL”). ELSS funds have a shorter lock-in, of 3 years, but for a period of 3-5 years equity can lead to anxiety because of its volatile nature. More so when the short-term goal is a non-negotiable goal like buying a house or paying education fees. For such goals, it is best to invest in FDs to save taxes and fulfil the goal.
An investor can even have a portfolio mix of equity as well as debt tax-saving investments for long-term goals. While ELSS funds can take care of the equity component, PPF can be a suitable debt component to provide stability to the portfolio. PPF is a fixed income investment that comes with a lock-in period of 15 years. A partial exposure to PPF can be used to mitigate the volatile effects of ELSS funds.
Another interesting avenue for investment is Life insurance. Life insurance has a sub-set of various products such as term plans, money back, whole life and ulips (unit linked insurance plans).Tax saving can be done by purchasing any of these plans as the premiums paid by you on these policies can be used for availing tax deduction upto the overall limit as prescribed under Section 80C of ITL. Further, the lump sum payment received under life insurance policy on maturity is also exempt on meeting condition prescribed under section 10 (10D) of ITL.
This kind of exposure in your portfolio would also depend on your income, age and risk profile. But the best way to get more than just tax saving out of your 80C of ITL investments is by planning them in a way that also helps you achieve financial goals.