Investments: Avoid last-minute rush, plan in advance

Balwant Jain

We have entered into a new financial year with fresh memory of last hour rush of making investments for claiming tax benefits. Some of you might have taken such decision in a hurry for which you may regret later on.

So is there any wayout to avoid such last hour rush and that too with probability of having taken a wrong one? Yes there is. Plan it in advance at the beginning of the year itself. This will help you in making right decision for investment in right products.

Classification of items eligible for deduction

The items eligible under Section 80C can be divided into two categories — mandatory and discretionary.

The first category has items like life insurance premiums, tuition fee of your children, provident fund contribution and EMI of your home loan etc. on which you do not have much discretion. Let us discuss this further in detail.

Rebate on school fee

Tuition fee paid for the full-time education of your two children in any school, college, university or any educational institution in India is eligible without any limit. In case you have more than two children, the expenses of other child can be claimed by your earning spouse. The tentative amount likely to be spent under this head can be easily estimated at the beginning of the year.

Contribution to provident fund

For those of you who are salaried, provident fund contribution is also mandatory and the annual deduction on this account can also be estimated based on your basic salary.

Life insurance premium

Just add up the life insurance premium of all insurance policies in force. In case you are planning to buy an additional life insurance policy, add up the tentative premium for that and you have the tentative annual figure of your eligible life insurance premium.

Please do not forget to add premiums in respect of ULIP policies in force or planned. Life insurance premium paid on your life or on the life of your spouse or children is eligible for deduction. However, in case the premium on any life insurance policy is more than 10% of the risk covered, the excess premium shall not be eligible for deduction.

The life insurance policy so purchased needs to be kept alive for a minimum period of two years failing which deduction allowed earlier is withdrawn and taxed.

Repayment of principal amount of home loan

Request your home loan provider for a provisional certificate of interest, which will have amount of interest and principal component in your total value of EMIs. If you have taken a home loan from specified institutions, you can claim the tax benefits for the principal repayment component provided you have already taken possession of the residential house. You are required to hold the house property for a period of five years from the end of the financial year of possession. In case you sell the house before five years, the tax rebate allowed earlier will become taxable in the year of sale. Any stamp duty and registration charges paid for such house are also eligible for the deduction.

Discretionary items

After deducting all mandatory items as explained above from Rs 1.5 lakh, the maximum amount available for deduction, you are left with the amount which you can invest as per your wish.

Under the discretionary category, you have products with different tenures, different rate of returns and different risks. Primarily the discretionary category comprises bank FDs, PPF, NSC, ELSS and deposits under Senior Citizen Saving Scheme. Which items to put your money in will depend on your risk appetite, age and anticipated requirement of funds in the near future.

For senior citizens, the deposit under senior citizen schemes or bank fixed deposit for 5 years are appropriate as the rate of interest and tenure is fixed. For others who have a reasonably long time horizon, items like ELSS will work better. In terms of returns in the long term, ELSS scores over all other forms of investments eligible under Section 80C and since has a lock-in period of three years and gains made on ELSS are tax-free. ELSS gives you better post-tax returns.

As explained above, those of you who are young and have risk appetite and long-term investment horizon, should invest the balance amount arrived as above in ELSS. Since we are at the beginning of the year, you should spread your projected investment throughout the year by investing through SIP. With the help of investing in SIP, you are insulated from the short-term volatility of the stock market. With SIP in ELSS you are able to reap the benefit of “rupee cost averaging” concept. Others who do not want to invest in ELSS can also spread their investment over the whole year.

For the additional deduction of Rs 50,000 in NPS proposed in this budget, you can spread the same over the year in 12 months.

So once the above strategy is implemented, you will be able to avoid last-minute rush and worry but will also be able to have smoother cash flow throughout the year.

The author is a CA, CS and CFP. Currently, he is working as Company Secretary of Bombay Oxygen Corporation Limited. The views expressed in this article are his own