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- Ideally, insurance should be purchased to cover the risk of life and not just as an investment option
- Mis-selling in case of Ulips is rampant especially in the January-March quarter as taxpayers are running around trying to invest in tax-saving options
- You need to evaluate all the benefits of your investments aside from the tax benefits to make an informed decision
New Delhi: There are several tax-saving investment options out there. However, not all of them offer the same benefits, returns and this is why tax planning is important. Investing just to save income tax is not the right way to go about it. You need to evaluate all the benefits of your investments aside from the tax benefits to make an informed decision.
A lot of people make the mistake of making hasty investments because they have to to to submit proof of investments to their employer. In order to avoid such mistakes, proper analysis is necessary. One can get easily confused about which tax-saving instrument to choose and this is why analysing tenure, return, performance etc.
Here are some key things to remember before investing in these 4 tax-saving instruments:
1. Life insurance plans: Sometimes people make the mistake of buying life insurance on the recommendation of a known person or because someone in the office is buying it. This is a huge mistake because insurance is not merely an investment option. Aside from premium and tax benefits, coverage should be the main focus while buying an insurance policy.
Ideally, insurance should be purchased to cover the risk of life. Generally, if an investment component is linked to an insurance product, the returns fall drastically due to high in-built charges. So, if you are looking at insurance as an investment, remember that there are other options which offer tax benefits, better returns, flexibility, liquidity and also target certain long-term objectives such as retirement.
2. Unit-linked insurance plans (Ulips): Ulips are another good tax saving investment options because they have offered returns at 8.09% interest in the past three years. However, these are usually mis-sold with the promise of guaranteed returns, quick money-back of invested capital and returns of above 25%.
You must remember that returns are not guaranteed in Ulips and often the detailed illustration, including the charges, is not shown to the investor. Mis-selling in case of Ulips is rampant especially in the January-March quarter as taxpayers are running around trying to invest in tax-saving options before the deadline expires.
3. Sukanya Samriddhi Account: Sukanya Samriddhi Yojana is one of the best tax-saving tax instrument when it comes to saving, investing for your girl child. With an interest rate of 8.4%, it is a great way to save for your daughter. Many parents invest for the purpose of meeting the educational needs of their children for higher studies.
However, one important point to remember is that only 50% of the maturity proceeds are payable when the girl child is 21-24 years. Hence, if you are planning to meet the under-graduation expenses of the girl child, there could be a gross mismatch in the amount required and the corpus built.
4. Additional NPS deduction: By offering moderate returns at 9.33% for the past five years, NPS is one of the best tax saving investment option at the moment. Since the government introduced the additional tax deduction benefit of Rs 50,000 for the National Pension System (NPS) under Section 80CCD (1B) over and above the Section 80C benefit, it might be a popular investment vehicle.
However, the additional benefit comes to only Rs 16,500 per annum (for people in the highest tax bracket of 31.2%). The pension benefits of such contributions at present value would not be over Rs 2,000 per month when they turn 60 years of age. Further, the value of Rs 2,000 per month after 30 years would be just Rs 500 due to inflation. So it might not be the best choice to invest just because of additional tax benefit.