The Problem
Putting money into financial instruments in the name of tax savings is like buying a book without knowing how to read. It seems easy to set money aside into PF, insurance policies and PPF to save on taxes that would otherwise get deducted from your salary. Most people land up buying life insurance towards the first few months of the year, because it seems to be the easiest to do for showing up as tax savings. But, there are several financial instruments in which you can deploy funds to save taxes under Section 80C of the Income Tax. Each of these have unique features and can work favourably, if you understand the benefits. Mix and match tax savings with your financial goals and you will be getting bigger bang for your buck.
Example
You land up going in for traditional insurance policies—committing a higher premium in exchange for a lower sum assured. Instead, you could go in for term insurance, which would help you to be adequately insured and will cost you less. Invest in equities through the ELSS and for your retirement into the NPS, to take care of your medium and long-term financial goals respectively.
Suggested intervention
List out your financial goals and bucket them into different time periods of priority. Now, distribute the money you need to save as taxes into these buckets so that you save on the tax liability and at the same time work towards each financial goal. In this manner, your tax savings will be clearly linked to a financial goal and work efficiently. Just the way you pick the right mix of food in a buffet to satisfy your hunger, you can pick tax saving instruments to align with your financial goals.
Tip
Take it upon yourself to invest in ELSS for financial goals that are less than five years away. For retirement, divert monies into the NPS and equities to benefit from power of compounding in the long run and tax benefits in the immediate term.
