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5 things to consider before making fresh 80C investments

5 factors to base your decision onThinkStock Photos
5 factors to base your decision on
Tax-saving investments should never be made on ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, you might try to make tax-saving investments at the last minute.

While choosing the right tax-saver, base your decision on these five important things, among others. Once you have got a fix on these, equally important is to choose a tax-saving instrument which can be linked to a specific goal.
1. How much deduction can you availThinkStock Photos
1. How much deduction can you avail
Section 80C allows deduction from gross total income (before arriving at taxable income) of up to Rs 1.5 lakh per annum on one or more eligible investments and specified expenses. These investments include life insurance, ELSS, mutual funds, PPF, National Savings Certificate etc., while expenses and outflows can include tuition fees, principal repayment of home loan, among others. If you have exhausted limit of Rs 1.5 lakh, you can also look at NPS to save towards retirement to save additional tax.

An additional deduction of up to Rs 50,000 under Section 80CCD (1b) for NPS investment is also possible. Further, the premium paid toward a health insurance plan for self, family members qualifies for tax benefit under Section 80D for Rs 25,000 and Rs 30,000 for those above 60. Interest payments made towards repayment of home loan can also be claimed under Section 24 of the I-T Act. The other deductions include donations under Section 80G, interest payments under Section 80E for education loan, etc.
​2. Fresh investments you need to makeThinkStock Photos
​2. Fresh investments you need to make
Run this exercise to evaluate whether you really need to make any fresh investments for this FY.

Non-Section 80C deductions: First, look at all non-Section 80C deductions like the interest paid on home loan, health plans, educational loan.
Section 80C outflows: Then consider Section 80C-related expenses like children's tuition fees, principal repayment on home loan, pure term life insurance plans premiums.
Existing Section 80C commitments: Consider all the existing Section 80C commitments to invest/to pay premium such as in EPF and endowment life insurance, respectively.

This gives you a total of existing commitments under Section 80C, 80D and other deductions. Now from your gross total income, reduce the amount to arrive at the taxable income. If your net income is still above the tax exemption limit of Rs 2.5 lakh, then you need to look at further tax saving.
​3. Type of tax-saving instrumentsThinkStock Photos
​3. Type of tax-saving instruments
Within the basket of Section 80C investments, there are two options to choose from: Investments offering "Fixed and assured returns" and those with "market-linked returns". The former primarily includes debt assets, including tax-saving FDs, endowment life insurance plans, PPF, NSC, Senior Citizens Savings Scheme, etc. The returns are fixed for the entire duration and generally in line with the rates prevalent in the economy. They suit conservative investors whose aim is to preserve capital.

The 'market-linked returns' category is primarily the equity-asset class. Here, one can choose from ELSS and ULIP, pension plans and NPS. The returns are not assured but linked to the performance of the underlying assets. They have the potential to generate higher inflation adjusted return in the long run to the extent they are based on the equity asset class.
​4. TenureThinkStock Photos
​4. Tenure
All the above tax-saving instruments, by nature, are medium to long term products: From a three-year lock-in that comes with ELSS to a 15-year lock-in of PPF. Some like life insurance require annual payments to be made for a longer duration.
​5. Taxability of incomeThinkStock Photos
​5. Taxability of income
Another important factor to consider is the post-tax return of the investment. For instance, most fixed and assured returns products such as NSC provide you with Section 80C benefits but the returns, currently 8% (five-year) annually, are taxable. This makes the effective post-tax return equal to 5.50% for the highest taxpayers. Considering the annual inflation of 6%, the real return is almost zero! Of all the tax-saving tools, only PPF, EPF, ELSS and insurance plans enjoy the EEE status, i.e., the growth is tax-exempt during the three stages of investing, growth and withdrawal.
​Making the right choiceThinkStock Photos
​Making the right choice
First, identify your medium and long term goals. A market-linked equity-backed tax-saving instrument is good for long term goals as equities need time to perform. And before considering a taxable investment, see the tax rate that applies to you and consider the post-tax return. A low post-tax return after adjusting for inflation will not help you in achieving your goals in the long run. Inflation erodes the purchasing power of money, especially over long term.
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