The two months of February and March are probably the most financially active months for individuals as well as businesses. The budget, the ending of the fiscal year and the filing of income tax means that most people run around getting things done hastily. But it is the third, which involves tax-saving attempts, that attracts the most knee-jerk reactions. While we Indians like to believe that we are investment savvy people, the fact is that a large number of us don?t plan our tax-saving investments. We just rush into them during the last few months of the fiscal year.
At this time of the year, a lot of us have a lot of things on our mind. Giving adequate though to tax-saving investments hence takes the backseat. We tend to analyze such investments on the basis of the tax it saves. If investing in something means we won?t have to pay taxes, then it means that it?s a good investment, right? Not really. Investing now to save tax means that convenience is given preference; the negatives of the investment are overlooked.
Take for example, Ulips. In the months from January to March, we keep getting marketing calls from Ulip sellers. This year, these calls started coming from December because from 1st January, new expense rules came into place that meant that only newer, lower cost Ulips could be sold. Hence, insurance companies tried selling as many of the higher-cost Ulips that they could in December. A tele-marketer will give you many reasons why Ulips are great investments, but they won?t tell you that Ulips have long lock-in periods, high costs and poor transparency. A Ulip investor has to make continuous payments for a certain period; their costs shoot up if these payments are stopped for any reason. You won?t be told about this by someone selling a Ulip, which will lead you to take the wrong investment decision. Sure, it?ll be a tax-saving instrument but not a good investment one.
Hence, to avoid such pitfalls, what you should be doing is planning your tax-saving investments. What you should be concerned about is returns, safety and liquidity. Government guaranteed systems like PPF and NSC would give you safety, but they have long lock-in periods. The best tax-saving investments in this regard are ELSS funds. They have a lock-in period of only three years and when investments in them are spread out via SIPs, you earn the benefits of long-term returns from equities. If you?ve missed out on tax-saving as yet, you can spread out the amount in three-four portions even now by investing in an ELSS fund till March 31.
The other thing I would like to mention here is the latest on the Direct Tax Code. The DTC was drafted last year, but its implementation seems to be in jeopardy now. The DTC would be a boon for regular, honest tax-payers. It would simplify things for the tax-payers, but that would be bad for people whose livelihood depends on a complex tax code. Within the government, bureaucracy and accounting profession, there seems to resistance against the DTC. These people, who have vested interests, seem to be fighting against simplifying the tax code. While I hope that the DTC goes through, all doesn?t seem well right now.
Whatever happens, it?s important to ensure that you plan your tax-saving investments to reap dual benefits. An investment, tax-saving or not, doesn?t make sense if it?s not giving you good returns, adequate liquidity and be relatively safe.
Author is CEO of Value Research