Due Diligence. Early bird gets more in hand

Just about a month and a half into the financial year, salting away money in Section 80C tax saving investments may be the last thing on your mind.

Sure, there’s quite some time left before next March beckons. But investing early in the year, rather than waiting till the fag end, has several benefits.

Last minute chaos can make the adrenaline rush and be fun at times. But not so when it comes to matters as important as investments. Rushing to deploy the money in February or March just for saving tax can lead to poor choices.

For instance, you may be well insured but racing against time; you may fall for the insurance agent’s spiel and buy a unit-linked insurance plan. Or despite having a surfeit of debt investments in your portfolio, you may still go for the five-year bank deposit, just because the bank’s a hop and skip away.

Tax-saving investment options help you save tax no doubt, but more importantly, they are meant to help you build a well-rounded portfolio. This is best done by framing goals, deliberating on your options, and deciding calmly. All this takes time.

When you invest early, the money starts earning returns sooner. Add to the brew the wonder called compounding, and the benefits of being quick-on-the-go cannot be overstated.

Say, you invest ₹150,000 — the maximum amount under Section 80C — in the public provident fund (PPF) in April, while your friend waits till next March to make the same investment.

At 8.7 per cent, you earn ₹13,050 as interest during the year, while your friend earns just ₹1,087. That’s not all.

If the investment matures after 10 years, you will have nearly 39,000 more in your kitty than your friend.

Note that in avenues such as the PPF and Sukanya Samriddhi Scheme which are offered by the Post Office, you get interest for the month only if the amount is deposited on or before the 5{+t}{+h} of the month.

So, plan well and time your investments right to make the most of them. But when it comes to equity-related investments such as equity-linked savings schemes, staggering your investment as opposed to diving in at one go is decidedly better.

Investing at the last minute can deprive you of the benefits of SIP investing.

It is financial folly to let funds idle away in your savings bank accounts. The interest rate offered on such accounts (4-6 per cent annually) is much lower than what you could earn on Section 80C instruments.

Of course, you must not stretch yourself too thin and go overboard on investing early at the cost of your liquidity. Always provide for contingencies by stashing away some funds, say three-six months living expenses, in easily accessible avenues such as fixed deposits and liquid funds. But a huge surplus over and above contingent needs, in savings accounts indicates financial lethargy.

Many employers require that employees submit proof of having invested in Section 80C instruments, before adjusting the tax deduction at source (TDS) from monthly salaries.

In such cases, it makes sense to invest early — you will then be able to reduce your monthly tax outgo and take home a bigger sum from the beginning of the year itself. The extra-take home (the tax that you save each month) can in turn be invested again.

Say, you are in the 30 per cent tax slab and invest ₹150,000 in April itself. That means a tax break of ₹46,350 for the year, which is apportioned over 12 months — about ₹3,860 a month.

Some employers allow tax adjustments from April itself merely on submission of investment declaration by employees. But this is on the condition that the investment proofs, as per the declarations, will be submitted on a later date, say by November or December.

If the employee doesn’t or is not able to submit the proofs by this time, there is a huge tax outgo in the remaining months until March. This can roil your cash flows. So, it’s a good idea to be disciplined and invest early in the year itself.

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