Investing for tax? 4 things you must know

You have 12 days to complete your tax investments for this year. If you are panicking, you will probably end up making a financial blunder.

Here are four things you may have not realised concerning the tax you have to pay. You will make a much smarter decision once you grasp this.

1. You may not need it.

It is not just investments that fall under Section 80C. Look at expenditure too.

Are you repaying a home loan? Then the payment towards the principal amount (not interest payment) is eligible for a deduction under Section 80C.

Have a child in school? Payments towards the education fees for children are also eligible for a deduction.

Once you are done with these expenses, look at the provident fund (if you are a salaried individual).

No, we are not talking about the Public Provident Fund which is a voluntarily investment. We are talking of the Employee Provident Fund.

A percentage of your salary (12% to be precise) is deducted by your employer towards the EPF. Since this is done automatically, you need to check your salary slip to find out the amount.

Once you calculate this, see if you still need to invest to touch the Rs 1,00,000 limit under Section 80C.

If you have already taken a life insurance policy or a pension plan, add to the above the premium you have paid this year.

If the above totals to Rs 1,00,000, you do not need to do any more tax investing. But if you have a PPF account, deposit at least Rs 500 in it to keep it going.

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2. You are stuck with it for a long time.

All tax saving investments have a minimum lock-in period. They are not like shares or mutual funds which you can sell anytime.

The National Savings Certificate has a lock-in period of six years. The Public Provident Fund has a lock-in of 15 years.

Even Equity Linked Saving Schemes have a lock-in period. These are mutual funds with a tax benefit. Unlike other mutual funds which you can sell whenever you want, you have to keep your investments in these tax saving funds for at least three years.

In reality, you may have to stay in for five years or more to get a good return. The reason is that your mutual fund returns depends on the state of the stock market. If the stock market is bearish at the end of three years, it would not make sense to sell. You would have to wait for it to start moving upwards to sell and make a profit.

And, of course, in insurance and pension plans, the money is only available many years down the road.

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3. It may not be the right investment.

Just because an instrument is available for tax saving, it does not mean you should invest in it.

Always look at it in relation to the rest of your other investments. Don't view your tax saving investments in isolation.

For instance, if you have already invested a fair portion of your money in equity (shares and mutual funds that invest in shares), avoid an ELSS. Opting for an ELSS means a huge portion of your investments will be in equity and that may  not be what you want.

Or, on the other hand, if you have invested huge portions in debt funds (funds that invest in fixed return instruments), post office saving schemes, bank fixed deposits and NSC and PPF, you could look at putting some amount in ELSS.

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 4. It may be a total rip-off

Let's say you are working on a contract or as a consultant and do not have an EPF. Neither do you have and children to claim education fees nor are you servicing a home loan. This means you have to invest the entire Rs 1,00,000 to get the tax break.

In such a situation, you may get conned by an insurance agent into buying a policy that does not suit you at all.

You may take a policy that will require you to pay a premium every single year for the next 30 years. Is that what you want? Even if it is, be careful. To reach your Rs 1,00,000 target, you may opt for a policy that requires you to pay a hefty premium. You will have to pay this year after year, even when your other monetary commitments begin to increase.

It may turn out to be the worst investment decision you ever make.

If you do not have the time to sit and think about your goals, how much it is you really need to invest in insurance or a pension scheme and how this fits your overall financial situation now and later, avoid investing insurance right now.

Instead, stick to PPF and NSC.

If a mutual fund agent tells you what fabulous returns an ELSS scheme has delivered, it is wise to avoid it. The market is high now and, should it crash over the next three years, you may have to wait for a long while to get a return on your investment.