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January-February-March, which in the industry parlance are referred to as JFM months, is that time of the year when a lot of people suddenly wake up to the fact that they have just a few weeks to either invest or buy an insurance to save on tax outgo for the current financial year. At the basic level, salaried people can invest in eligible investment products, buy an insurance policy or use the home loan principal payment aggregating up to Rs 1 lakh per annum to save on taxes. In addition, there are options like buying a health insurance policy for self and aged parents, invest in NPS through your employer, etc, making one eligible for extra savings on taxes.
Financial planners point out that among those who look for tax savings during JFM months, there are two types of people. One is those who just want to save on taxes. And the other one is those who not only want to save taxes but also want to look at the long-term wealth creation opportunities which the tax savings products offer.
The fact, however, remains that tax planning should not be just a JFM affair. It should start in April. At times, it so happens that because one has to invest Rs 30,000-40,000 to bridge the gap for Rs 1 lakh limit, domestic budgets could be stretched. “But if you are being forced to look at tax savings options at this point of time, probably the right way would be to also look for tax savings options that can take care of tax planning for next year too, that is financial year 2014-15.
While insurance remains one of the most sold tax saving product at this point of time, Paranjpe also warned that before buying insurance one should also evaluate if an individual needs an insurance or is it being bought just to save taxes. If the latter is true, then rather than buying an insurance policy, one should look at investment products that can also create wealth over the long term, he said.
Currently some of the popular investment products for tax savings include equity linked savings schemes (ELSS) from mutual funds, provident funds and National Pension Scheme (NPS) run by the government. Outside of this, buying a term insurance plan, which a low-cost protection product, could also be an option. In addition, if one does not have a health cover, the person could also buy such a plan that allows deductions of up to Rs 15,000 per year. Heath cover for parents who are senior citizens allows deductions of up to Rs 20,000 a year.
Of these tax savings options, ELSS from mutual funds, although they invest large portions in stocks and thus carry higher risks, offer the likelihood of accumulating higher wealth. These funds invest at least 65% of their corpus in stocks in the Indian market and come with a lock in period of three years. In provident funds — EPF and PPF — there is nearly a guaranteed return, which in the last few years been in the range of 8.5-9% per annum. In NPS again, there is no guaranteed return but given the low cost and the professional fund management skills that this product brings in, a large number of financial advisors are advising this product to their clients.
Financial advisors also warn of mistakes that people commit when they are in a hurry to invest or buy an insurance to save on taxes during JFM months. For one, often they are sold the wrong product which neither has any relevance to their risk profile nor they help in meeting any of the financial goals of the person investing. In some cases, lack of knowledge is also responsible for such mistakes. For example, a Mumbai-based financial planner once found that one of his newly acquired clients had a large number of insurance plans, bought over several years. The client had no knowledge that just by paying the insurance premium every year one can save on taxes. Instead, the person thought that to take advantage of the tax savings options it was necessary for him to buy a new insurance policy every year.
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