Save 1Lakh in 30 days?

Be prepared to show investment proofs

The only cold comfort for Humayun, if at all, is that he is not alone. Millions of taxpayers across the country compress their entire year’s tax planning into one month.

For salaried taxpayers, the tax-saving season kicks off when they get a note from the accounts division on how much they need to invest. With it comes the warning: give proof of investments or get ready for a hefty tax deduction at source (TDS).

“That’s the time when undisciplined investors start running around like headless chicken,” says a financial planner.

In the rush to invest before the deadline, taxpayers often make fundamental investing mistakes, which they rue for years to come.

Gurgaon-based software professional Ashwin Arora knows the perils of just-in-time tax planning. Three years ago, he was working with a large global consulting firm that gave him less than two weeks to show proof of his investments.

“My company asked for proof by the end of the calendar year and I had only my provident fund contribution to show,” he says. So, Arora promptly invested Rs 33,000 in three tax-planning mutual funds at one go. This was just a few days before the markets went into a tailspin in 2008.

“The three funds are good performers but my investments are still in the red,” he says glumly. Small investors should not put large amounts as a lump sum in equities. It’s best to stagger the investment in monthly SIPs.

Person: Ashwin Arora, 28 Gurgaon
Investment: Rs 33,000 in three ELSS funds
His mistake: With tax-saving deadline staring, invested a lump sum in three funds, all of which are running in losses.

Focus on returns instead of tax-saving benefits

More importantly, experts say tax planning should be a part of the individual’s overall financial plan.

In other words, the investment choices should not be governed by the potential returns they offer but by their ability to fit into the asset allocation of the individual.

“One should choose the option depending on one’s risk appetite and asset allocation,” says Pankaaj Maalde, a financial planner working with Mumbai-based Sykes & Ray Financial Planners.

Invest in the Public Provident Fund (PPF) if you need long-term debt in your portfolio. Go for NSCs, fixed deposits and infrastructure bonds if you want medium-term debt. Buy ELSS funds if you want equity exposure. And take an insurance policy if you require life cover.

The best way to assess the suitability of an investment option is to look at it without the tax-saving benefits. “The tax benefits should be seen as the icing on the cake, not the cake itself,” says PV Subramanyam, financial trainer with Iris. Simply put, the tax deductions under Section 80C are only incentives provided by the government to encourage savings.

Do you need an insurance cover? Would you buy an insurance policy if there was no tax incentive? If your answer to both the questions is yes, go ahead and buy a policy.

Similarly, ask yourself if you need to invest in equity funds. Or in fixed deposits. Once you are able to define your needs, you will be able to choose the right option.

These cardinal rules of investing are quickly forgotten in the rush to meet the investing deadlines set by employers. Who has the time to sit down and weigh the choices when time is running out.

Be wary of the insurance cover you get

Delhi-based Jasneet Bedi is 31 years old, earns a six-figure salary and is aware of the potential of equities to create wealth. But when it comes to her tax savings, she just puts Rs 70,000 in her PPF account.

“I have been wanting to invest in ELSS funds but never have the time to sit down and research which is the best scheme,” she says.

What she doesn’t realise is that she is losing out on a terrific opportunity to create wealth by combining her tax investments with financial planning. Had she done that, the ELSS option would have been more compelling than PPF. Or it could be a good complement to the PPF.

Like her, many taxpayers find it infinitely easier and less tasking to believe the friendly broker and sign where he has marked ‘x’ on the application form.

Others are led by non-financial reasons to opt for unsuitable options.

Kolkata-based sales executive Debarati Ghosh invested in a Ulip three years ago because a friend was selling it. “He even gave me Rs 8,000 in cash in the first year on my investment of Rs 50,000,” she says. Her Ulip has done fairly well and the fund value has grown to almost Rs 2 lakh. But Ghosh also realises that had she opted for an ELSS scheme, she would have earned much higher returns.

Person: Debarati Ghosh, 30, Kolkata
Invested: Rs 50,000 in Ulip
Life cover:Rs 2.5 lakh
Utility: Nil. The life cover is too small.
Her mistake: In a hurry to save tax, didn’t check if the product suited her.

Many of us are guilty of such friendly mistakes. Two years ago, Arora bought a Ulip on the advice of a broker even though he didn’t have any financial dependants. He’s paying Rs 16,000 a year for a life cover of Rs 3.2 lakh and has vowed not to buy a unit-linked plan ever again. “I made a mistake, but have to continue with it otherwise I will end up paying heavy surrender charges,” he says.

Life cover should suit your requirement

Often, the friendly adviser is not acting in the best interests of his client. Humayun’s chartered accountant did not point out that he needn’t have bought the insurance policies. The tuition fees of his two daughters would have sufficed.

Mumbai-based businessman Rohit Ruia has endowment insurance policies that give him a cover of Rs 2 crore for an annual premium of Rs 2 lakh. Though this was sufficient for his needs and he didn’t require any more tax-saving investments, his broker sold him a Ulip six years ago.

“This portfolio suggests that all the investments were ad hoc and done in a hurry without giving a thought,” says Kartik Jhaveri, director of Transcend Consulting, a Mumbai-based financial planning firm.

Person: Rohit Ruia, 35, Mumbai
Invested: Rs 2 lakh in endowment policies and Rs 50,000 in a Ulip
His mistake: Bought additional life insurance cover he didn’t need

Chandigarh-based Dhiraj Gupta has also made the same mistake but he has learnt how to make the most of it. He bought an endowment insurance policy when he started working around nine years ago and pays Rs 35,000 a year for a life cover of Rs 7.5 lakh. “I know I made a mistake but terminating the policy now will not serve any purpose. So I treat the premium as an allocation to debt in my financial portfolio,” he says. For life insurance, he has bought a term plan that covers him for Rs 70 lakh.