Think Tax Saving, Think Goals

Most of you think that tax saving is a one-time activity at the end of each financial year. We would like to bust this myth as tax saving is a round the year activity and with proper planning you can also achieve your other financial goals. Through this article we would like to bring a change in the way you invest and help you with the right option to invest for tax saving.

First, let’s get the basics out of the way before we get into the options, their benefits and finally, the ideal choice. Under section 80C, you can invest a maximum of Rs. 1,50,000 and save up to Rs.46,800 in taxes annually. Since the tax benefit at the time of investment is same across all alternatives, what matters is the risk taken and the return expected from the chosen option.

Tax saving investment can be broadly classified into:

1. Market linked products i.e. equity oriented, like ELSS and ULIP, which offer higher but volatile returns.

2. Fixed return products i.e. debt oriented, which offer lower but guaranteed returns, like PPF, NSC and FD.

Here are the essentials to compare each of these:

*Data as per Indiapost.gov.in; #Average returns of ELSS funds over the last 10 years; +Average returns of multicap ULIPs over the last 10 years; ^Data as per (sbi.co.in) SBI — Tax Savings Scheme Deposit (SBITSS) interest rates as applicable to General Public; @Effective April 01, 2018, all equity and equity related instruments such as listed equity shares, units of equity oriented mutual funds or any such instruments that have bearing of equities, will attract long-term capital gains tax @ 10% (plus cess) for gains exceeding Rs.1 Lakh p.a., without any indexation benefit; & Investment growth is shown pre-tax over a span of 10 years for an investment of Rs.1.5 Lakh

In the first category of Market-linked products, ELSS scores over ULIP since it is a simpler product with shorter lock-in period. ELSS are mutual funds which invest in stock market to generate returns. In the second category of Fixed Returns products, PPF is better than others because returns are tax free, although it has a longer lock-in period.

By now you must be thinking that (just like others), we too will recommend ELSS funds like some silver bullet to take care of your tax saving. After all the historical (10-year period) returns for ELSS do look fantastic, right?

But NO! We want to focus on the bigger picture here.

Firstly, please remember tax saving is a necessary annual exercise. It enforces investment discipline and is best done when tied to a specific goal.

Secondly, any investment decision should focus on you — your goals, life stage, current investments and financial position. It is certainly not just about the returns offered. So choice of goals is very important which needs some thought and that is what we want to focus on.

Broadly goals can be classified into two categories:

A. Aspirational Goals, such as:

1. Grand wedding for children
2. World tour with your family
3. Buying a dream home (Or any other dream you wish to fulfill)

These goals are long term & aspirational where you intend to spend based on the value of your investments in future. These goals need a large sum of money and hence equity exposure is needed for long term wealth creation potential.

B. Need based Goals, such as:

1. Retirement planning
2. Child’s education
3. Repayment of your home/car loan

These are goals which are also long term oriented but here you expect more certainty in your investment returns, growth and value. Given the stable nature of returns and less volatility desired in this goal, you should consider Fixed Return oriented products.

We would like to highlight that it is a common mistake to decide your goals based on your age only. Your goal also has to be a function of your current investments, your aspiration, your needs and your income.

For example, most young people are likely to have ASPIRATIONAL goals given the fact they have high risk taking ability. But even someone in late stage of professional life can have an ASPIRATIONAL goal. This can happen if he/she has carefully saved enough money for his post-retirement life and still has surplus money to achieve his unfulfilled dreams or aspirations.

Similarly, NEED-BASED goals are typically associated with middle aged people or people nearing retirement. But we believe this is not right because you need to plan for retirement much before you actually retire. Even for a young professional, if large sum of money is already invested in volatile and risky assets, it is a good idea to have a NEED-BASED goal to save for your retirement.

Hence don’t link your goals to your age only. This tax saving season, think before you choose the tax saving option. Firstly, look at your current investments, aspirations and needs to decide your goal. Secondly, once the goal has been decided, choose the appropriate tax saving option. If you have an ASPIRATIONAL goal, choose ELSS but if you have a NEED-BASED goal, choose PPF. Thirdly, be disciplined and stick to regular investments to achieve your goals. Taking the SIP route in case of ELSS is a great way not just to ensure disciplined investing but getting the benefit of rupee cost averaging too. If you can follow this, you will never have to sweat over tax saving season or the options available.

We leave you with — “Think Tax Saving, Think Goals”

Agree with us, but don’t know which scheme to choose — Check out “Invest to Save Tax” in Investment Ideas section. Download the app to get started. You also get the tax statement to submit as investment proof.