covernote. Time to reflect on tax saving options

For years, investing to avoid tax was a limited to a few, well-known options. Life insurance policy, Employee Provident Fund or Public Provident Fund and a few more.

We have a wider choice now and so much else has changed around this activity of investing to reduce taxes.

The most important of them is that investing to get a tax break, under various sections of Section 80 of the Income-tax Act, 1961, is on its way out.

In the ‘new tax regime’, you pay lower taxes and cannot avail of any tax saving investment. A couple of years ago you had to opt to move to the new tax regime. Last year, the new tax regime was the default and you had to opt for the old tax regime if you needed to stay on. It is clear that the old tax regime will go. When, it’s not been said but in two or three years is an intelligent guess.

What does this imply for your year-end flurry?

Section 80 investments can be one-time commitments or repeat investments. One-time commitments like PPF, tax saving fixed deposits or National Savings Certificate mean that you can invest as much or as little as you like in one year and not at all, or a very minimal amount, the next. A life insurance policy, on the other hand usually means repeated premium payment for several years on end with the policy validity actually depending on your paying up regularly.

If, or rather when, Section 80 benefits end, and you have one of the former type of investments its flexibility is going to work to your advantage. Unless it is intrinsically a beneficial investment and you can afford the outlay, you should avoid investing further.

However, if you have one of the latter, like a life insurance policy, you will still have to keep your life policy going. And please do so!

Going forward, if you are investing just to save tax, keep this in mind and opt for a one-time, pay-as-you-like instrument. Of course, repeat commitments like life insurance should be in your reckoning, but only ever buy it for its real purpose, and not to save tax.

Either way, keep the financial commitments you have made and don’t make past investments a lost cause!

(The writer is a business journalist specialising in insurance & corporate history)

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