In the first part of this article, we explained the various options available if you want to save tax and yet earn a fixed return on your investment.
The question we answer now is how much of your tax-saving investment must be allocated to fixed return and how much to Equity Linked Savings Schemes (ELSS). These are mutual funds that invest in the stock market and give you a tax benefit under Section 80C. With a lock-in period of just three years (which means you cannot withdraw this money for three years), they make for a great investment.
Let say it is your first job and you want to invest for the long term. Since you have age and time on your side, the best investment would be ELSS. Of course, it is advisable to also have a fixed income instrument in your portfolio. If you are a salaried employee, your PF would give you that option. If no provident fund is available, then do opt for PPF.
If you have already invested in mutual funds or in the stock market and have no fixed-return investment, then bypass ELSS as a tax-saving option. But, if you have only fixed return investments, then you should allocate most of your tax saving to ELSS.
Once you decide how much to allocate to fixed return instruments, the next step would be deciding which fixed return investment to opt for.
PPF vs NSC
A debate always rages about the benefits of choosing Public Provident Fund and National Savings Certificate as investment options. Both are safe and backed by the government. Moreover, both give a return of 8 per cent per annum.
Over here, the time frame will be the main consideration. NSC is only a six-year investment as against 15 years for PPF. So if you need the money much sooner, then NSC scores. However, if you are looking at a long-term investment that you can stash away for retirement, then PPF is the best. If you invest Rs 70,000 every year in PPF for 15 years, you will end up with more than Rs 22 lakh.
Or, if you have surplus funds inspite of having touched the Rs 70,000 limit of PPF and want a fixed-return investment, then NSC would be the next logical choice.
If you are looking at the shortest tenure, then you also have infrastructure bonds (three years onwards) and bank deposits (five years onwards) to choose from. The interest rate from these investments should hover around 8 per cent, the same as NSC.
Get cracking on your tax planning
To be a smart investor, you must realise tax planning is a year-round event and not something that has to be shelved till March. However, the best time to plan your tax investments is at the start of the financial year. This will help you take maximum advantage of opportunities to reduce your taxes, especially, if you are going to invest periodically.
Where investments like ELSS are concerned, it makes sense to allocate a fixed amount to them at the start of the year. Every month, with the help of a systematic investment plan, allocate a small portion to your fund. Let us say, you decide on Rs 1,000 every month. You can instruct your mutual fund to directly debit this amount from your bank account. So every month, on a fixed date, you would be buying units of a fund of your choice.
You need not buy your NSCs at one go either. You can buy an NSC certificate whenever you want.
With PPF, you have the option of 12 deposits in a year. So you need not invest the limit of Rs 70,000 at one go.
Where bank fixed deposits are concerned, you can open them during the year at different time frames. Let us say, you decide to invest Rs 20,000 in a five-year bank deposit. If you have just Rs 10,000 available to invest at the start of the financial year, you can still go ahead and open a five-year bank deposit. Six months later, when you do have surplus cash, you can invest the balance Rs 10,000.
That is why it makes sense to do your tax planning at the start of the year. And once you plan it, you don't have to invest all the money at the start. Do it as the year progresses. But, for your own sake, don't leave it all for March.
By the way, seven months of the financial year have already passed you by.
Value Research is a mutual fund research organisation.
