Saving income tax: ‘Focus on choosing the right product; NPS a good long-term bet’

It’s that time of the year when we get knocked around by accounts department for proof of tax-saving investments in eligible instruments under Section 80C, Section 80D, etc. It’s also usual for people to postpone the matter of completing the necessary investments till the end.

When accounts department comes down heavily with the deadlines, there is usually the scramble to find instruments to invest in so that one can take full advantage of available sections under income tax act. It is here when people make mistakes. In this last minute scramble to meet the deadline, investors get caught in the web of wrong products which may not make much sense for them, overall.

Is investment necessary for tax savings?

There are investments like EPF contributions & insurance premium that one is paying, which help in savings taxes under Sec 80C. For many, this by itself would be enough. Also, one may be paying off home loans. The principal portion of the EMI is counted under Sec 80C. The basic tuition fees paid for up to two children is also counted in Sec 80C. So, in many cases, further investments may not be necessary to complete Sec 80C deductions.

Some also have medical insurance policies from the past for themselves and their parents – both of which come under Section 80D. Some people pay certain additional premium for enhanced cover for themselves or their parents, under the group medical policy given by their employer. This also comes under Section 80D. So, the thing to do is to evaluate how much of these sections one has already taken advantage of & then see if any further investments need to be done.

Mistakes while investing for tax-saving

The products chosen should be such that they are a good fit in one’s portfolio. These products should be the right candidates to achieve or further the client’s goals. The mistake that we often encounter is the razor-like focus on just getting the investment proof without really looking at whether the product is inherently suitable for them. This results in unintended products which are misfits in one’s overall portfolio.

Choosing the right products (even for tax savings)

The first step here is to look inward. The portfolio that one has and what is the kind of investment that one will have to make, needs to be properly examined. When looked at this way, we are keeping all options open. For some, it may be an equity oriented product that may make sense. The right product for them may be a ELSS fund.

For others, there may be a need to introduce fixed income products in the portfolio. There are several such options available – PPF, NSC, five year bank FDs etc.

There are also hybrid options that have become available like National Pension System (NPS) where equity allocation can be upto 75%. Also NPS allows for another Rs.50,000 additional investment ( under Sec 80 CCD 1B) over and above the Rs.1.5 Lakhs available under Sec 80C. This option sounds interesting, right? Let us examine.Why one can choose NPS?

NPS is a pension product available to any citizen below age of 60, where they can contribute and start receiving an annuity from 60 or later. The money can be invested in equity, corporate & government funds. The equity allocation till age 50 can be as high as 75% of the overall assets, if one chooses.

The advantage in NPS is that one will save tax under Sec 80C up to an amount of Rs 1.5 lakhs. If that amount were already exhausted by other investments, Rs 50,000 can further be claimed under Sec 80 CCD (1b). This is an additional benefit available only under NPS.

The other advantage as a product is that the fund management charges are extremely low & hence the returns available to a subscriber are commensurately high. There is a choice of eight fund managers to choose from & one may change from one to another, once in a year.

One may change from one class of fund to another (for instance from equity fund to government fund). There is no upper limit to how much one may invest in NPS. Hence, this is a great product to invest even otherwise.

This product is exempt from tax at the investment stage up to the limits specified under the tax sections & exempt for taxes on interest. On reaching the age of 60, one may withdraw up to 60% of one’s corpus without tax incidence & 40% needs to be annuitised. This annuity is taxable though.

If one considers the product benefits overall, NPS is a great long-term product that offers lots of flexibility to invest in multiple assets, with low charges. It saves taxes and allows one to withdraw up to 60% tax free. So, whether your investments are to be in equity/ debt, NPS can work quite well. This product is a credible choice as an investment option and also for tax savings.