Thursday, February 19, 2009

Where to invest to save tax???

WHERE SHOULD I INVEST MY MONEY THIS MARCH??

Folks this is that time of the year once again when we frantically have to plan our investments with a view of saving taxes. Quite a few of us find this quite confusing and tiresome since they don't really have the adequate knowledge about the various products /tools which are available in the market for tax saving purpose. Most of us do the investments based on the recommendations of seniors or friends or colleagues without really giving it a serious thought. Most don't bother to invest with a view of building portfolio for wealth creation while investing as long as they manage to save the taxes to be paid that year.

This approach to investing is not correct as it does not help you get the max out of your hard earned money in the long run. So lets examine the various options for tax saving and then see which one is the best for us.

The various options available under Sec 80C are as under where you can invest upto 1 lakh and the same amount will be deducted from your overall income and hence wont be taxable.
1. PF
2. PPF
3.ELSS
4. Insurance
5.Housing loan principal repayment.
6. Education loan
7.NSC
8 FDs over 5 year
9 NABARD bonds
10. Housing loan interest repayment
While investment in any of the above will help you save taxes to the same extent , they do vary from each other in the returns that they offer you at the end of the investment period. Basically there are 2 types of instruments
1. One that invest in debt/bond etc like PF,PPF,FD,Bonds,NSC etc
2. Other is where money is partly or fully invested in equities like ELSS,ULIP etc.
It is common knowledge that in long term equity offers the best return and hence is the most desirable investment class. The equity a an investment class will give you 12% returns over 10-15 years time frame, while debt funds will give at the most 8-9%. This with the effect of compounding will result in huge difference in the maturity amount. And as such it is always prudent to invest in equity based tools while deciding for tax saving investment. In this case I recommend people to invest in ELSS. This is a great toll as it offers you the option of equity,debt and balanced funds depending on your risk appetite . The fund has lock in of just 3 years which is minimum among other options available (ULIPS too have 3 years lockin but the returns dont compare at all due to high charges, hence not recommended).
After 3 years you may withdraw as well without any load or charges in the most funds available today. Also the maturity amount is free of tax.
Hence, to conclude, next time when you sit to decide your allocation of Rs 1 lakh, do these things:-
1. Find out your PF deductions. Since PF too forms part of Sec 80c any amount deducted for PF will automatically be deducted from overall income and hence be part of your 1 lakh under Sec 80c. For ex- IF your PF deduction is Rs 30000 pa then you need to invest only Rs 70000 additionally under Sec 80C to get max benefit.
2. See if you are running any Housing Loan. The principal part which gets repaid also forms part of Sec 80C.
3.Rest invest in good diversified equity based ELSS. Some of the good ones in India are
- HDFC TAX SAVER
- SBI MAGNUM TAXGAIN
In case you also want to invest in insurance plan to safeguard yourself against any eventuality while taking the benefit of tax saving, then I suggest invest in a combination of pure term plan and ELSS and NOT into ULIP.
Hope this helps settle some of your tax saving blues.

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