Every year, as March 31 approaches, many folks scramble around to make their tax saving investments for year. March is ALSO the month when insurance companies and Equity Linked Savings Schemes of mutual funds SEE their maximum inflows. So, if you’ve left your tax saving investments for the last minute, where should you invest now?  

In this episode of Question of Money, we’ll answer that question and also talk about how you should approach your tax saving investments.  

Last-minute options 

A little bit on tax saving investments first, for new investors. If you are still under the old tax system, you can protect upto Rs 2 lakh a year of your earnings from income tax by making investments that fall under section 80C or section 80 CCD (1) of the Income Tax Act. Section 80C allows you to save upto Rs 1.5 lakh a year from taxes, if you invest in an approved list of investments that includes insurance schemes, tax saving deposits from banks, pension schemes, ELSS schemes from mutual funds, NSC, EPF and Public Provident Fund, NPS and other products. You can save another Rs 50,000 if you invest additional sums in a NPS Tier 1 account.  

So, the first thing to do is to check if your EPF contributions for the year already fill up your section 80C limits. If they do, you need not take further action. But if you don’t have EPF or if it is much less than Rs 1.5 lakh, then you’ll have to think of other tax planning options. If you have left your tax planning to the last minute, it is best not to invest hastily in two kinds of products – those with a very long lock-in period where you commit to making repetitive investments year after year, and those which carry high risks.  Therefore, it would be better to avoid insurance schemes where your money can get locked in for 10-15 years or even more, at low returns. In insurance products you will be committing yourself to a fixed premium for many years.  

ELS schemes from mutual funds are a usually a good option and carry just a 3 year lock in period. This is the lowest lock-in among tax saving schemes. But investing say Rs 1.5 lakh in these schemes as a lumpsum today, is not very advisable as the stock market has run up a lot and can correct losing your capital. The best way to invest in ELS schemes is through SIPs and not lumpsums. If you really have a lumpsum to invest and very little time to think it through, you may need to go with a tax saving deposit with a bank this year. These carry a 5-year lock in and interest rates range from 6.5% to 7.25%. Do note though, that the interest will be taxed at the slab rate.  

Long-term options 

It is certainly not a good idea to scramble in the last minute to complete your tax saving investments. All of us have only a limited ability to save. Therefore, it would be best if we can fit our tax saving investments into our overall saving and investing plans.  To do this, you will need to invest regularly in tax saving investments, as part of your goal-based investing.  To get the most out of your tax saving investments, you can do one or more of the following starting April 1.  

Set up a monthly SIP in a good ELS fund which will add up to Rs 1.5 lakh a year. There are also specially designated retirement mutual funds with a 5 year lock-in which are a good bet for SIPs. Using the SIP route reduces the risks associated with market volatility or a correction in equities, because you average your costs downwards if there’s a market fall.  

Open a Public Provident Fund account with your bank, and start contributing Rs 1.5 lakh a year. The PPF is a government backed scheme where the interest is declared by the government every quarter. This scheme is good option for the debt portion of your long term investments because the interest is market linked and is tax-free, a facility not available anywhere else. The PPF carries a 15-year lock-in though you are allowed partial withdrawals after 7 years. Your PPF investments can vary between Rs 500 and Rs 1.5 lakh a year. 

Open a NPS account and sign up for SIPs like you would with equity funds. This is a very low-cost, market-linked retirement scheme where you can choose to invest in equities, corporate bonds or government securities (see our previous video on NPS). You can invest anything between Rs 1000 and Rs 2 lakh to save taxes, in the NPS every year.  You should choose between safe options such as PPF and risky ones like NPS and ELSS, based on your risk appetite and the horizon over which you can hold your investments.  

(Host: Aarati Krishnan, Producer & Edits: Anjana PV, Camera: Bijoy Ghosh & Siddharth Mathew Cherian)