Regardless of whether one falls under the 30%, 20% or 10% tax bracket, everyone rushes to save tax by availing the maximum possible exemption of up to Rs.1 Lac via the 80c/ccc/ccd/cce deductions. Due to lack of social security, government encourages savings by granting tax deduction for investing in instruments that help save for retirement. A variety of instruments are eligible for such deduction to cater to the varying risk appetite of the public – eg. PPF, NSC, 5-year Fixed deposit, ULIPs (Unit linked investment plans), Pension plans, ELSS (Equity Linked Savings Scheme) etc. Although most investors use a mixed set of instruments, insurance policies attract greater participation in tax savings.
Savings achieved, but what about returns?
We see a number of tax saving policies spring up in the last 3 months of any financial year from various insurers luring 80C deductions even for single premiums. For someone in the highest tax bracket, Rs.1 Lakh invested in a tax saving insurance scheme helps save Rs.31,200 of your income – but what about the return from your policy? Have you considered higher returns from alternate investments?
As can be seen, PPF (Public Provident Fund) or even ELSS (Equity Linked Savings Scheme) could effortlessly give you 92% more return at the end of 15 years when compared to the return from your insurance policy. Not only that, in the case of PPF, you know exactly how much you’d get back in return at the end of the 15 year term, unlike the insurance policy where you only have an illustrative figue that by no means guarantee anything. So, tax saving using insurance policy works, but don’t you want your returns to be great as well?
Financial Planner’s take!
While it is important to save tax, what is more important is to make sure that tax saving comes as a benefit (or by-product) of an investment and not vice versa. Tax planning is about making sound investment choices which would provide you with reasonably good returns along with the benefit of tax savings. In essence, choosing the right 80C qualifying instrument should not just help you save taxes, but most importantly it must ensure such investments are aligned with your goals!