In this year’s budget Finance Minister raised Sec.80C limit from existing Rs.1,00,000 to Rs.1,50,000. With this great news, plenty of people felt happy as they can save more tax outgo. But there are so many pitfalls which one need to take care before blindly investing another Rs.50,000. So whether it is boon or bane??
First let us understand what are popular products that will be eligible for deduction under Sec.80C.
1) Life Insurance Premium.
2) PPF (Pubic Provident Fund).
3) You contribution towards Employee’s Provident Fund (EPF).
4) Equity Linked Saving Schemes (ELSS).
5) Home Loan Principal Payment.
6) National Saving Certificate (NSC).
7) 5-Yrs Tax Saving Bank and Post FDs.
8) Senior Citizen Savings Scheme (SCSS).
How this further increase of Rs.50,000 is boon?
This is boon because predominantly Indian investors are always look for the ways to SAVE TAX. In this way it forces individuals to save more than spending. This makes them financially free. But what if they invest in wrong products on only lure of SAVING TAX?
How this further increase of Rs.50,000 is bane?
1) This forces you to invest in ANY product which saves you from paying further tax on income of Rs.50,000. So no planning nothing.
2) Your Life Insurance Agent will be happy with this increase as he have more valid reasons to force you to invest in Endowment or ULIP plans. But stay away from such products apart from buying term insurance (whether online or offline).
3) You tend to invest in Bank FDs whether they actually meant for use in future. Because you have not attached any financial goals to this investment.
4) ELSS is one of the lowest lock in product in all above listed product, which is 3 years only. So you harp at this product to invest thinking that you will get back the invested amount with SOME return after 3 years ONLY. But you forget that equity investment is meant for long term. So you must invest in this product if your time horizon is more than 5-7 years. Otherwise you may end up in negative return after 3 years if market is at it’s low.
5) You plan to invest in PPF because it’s limit is also raised to Rs.1,50,000. Also it’s return and maturity amount are tax free. But you forget that it is less liquid product and you need to invest in this product only if your financial goal matches with this product. But for me this is a best product in debt category if your financial goal matches of long term.
6) You make your life’s biggest financial decision of buying home. Because it increases your status in society and apart from that home loan principal is eligible for deduction under this section. But do you feel it is an investment for what you are paying? No….it is expenses but not investment. Because you are not fetching interest or return on this. Instead you are paying interest on this loan. So any loan or interest you pay is always considered as expenses.
So what is the lessons?
Don’t rejoice with this increase. Instead first identify your financial goals. Then based on that choose a product which actually matches your need (both goal and tax efficiency) then start investing. Otherwise there will be no change in your financial life and you commit blunders year on year in a mood that you are utilizing the full limit of Section 80C. But where you are heading?? Directionless…and this is dangerous drive.
Image courtesy of [Stuart Miles] / FreeDigitalPhotos.net
Budget 2014-Debt Mutual Funds Taxation
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Mahesh
Hi Basavaraj,
I want to know that under section 80D can I claim for medical expenses incurred on any of my dependents (not the health insurance premium)?
If yes, then what documents I need to submit (e.g. hospital bills, medical bills, etc).
Thanks.
Basavaraj Tonagatti
Mahesh-Sec.80D refers to the premium you paid towards medical insurance ONLY but not for medical expenses. Hence, you can’t claim that. However, under Section 80DDB, you can claim expenses for some specified diseases (but not for all) expenses incurred on you and family.
Mahesh
Thank you very much.
I believe that under sec. 80DDB one can claim only in case any dependent is physically disabled or related problems, right?
However, I also came across some blogs saying that one can claim under sec. 80DDB even for conditions like Cancer, HIV, etc. Is it true?
Regards.
Basavaraj Tonagatti
Mahesh-That is Sec.80DD. That is what I said, there are some specific diseases which can only be claimed under Sec.80DDB.
AJINKYA D
Dear Basu Sir,
I have joined one PSB as an officer four months back. My Gross Salary is 36k. Of that 3233 Rs is my NPS contribution.
I have on LIC policy of 15 yr term with Yearly premium of 6800 Rs. After reading your posts i strongly feel that this decision of mine was not financially sound. I don’t want to make such bad decisions again.Hence kindly guide me on my future plannings.
I want to know
1) Whether i should go for ULIP or Term insurance + Mutual funds.
2) The best term insurance plans purely on the basis of claim settlement ratio, since i want my family to get the SA without much stress in case of any eventuality.
3) How to start investing in MF through SIP’s. I am a layman in terms of knowledge of MF. Its because i feel we continuously need to monitor our portfolio unlike in the case of Bank RD or FD.
4) Does term insurance covers accident clause or i need to buy one extra insurance cover for that?
5) How to plan my Health insurance goals. I have a family history of Diabetes,Ashtma,BP from fathers side and Arthritis from mothers.
varsha
Sir,
Please guide me I have taken Jeevan Anand policy of Rs. 68943 as yearly premium.I have paid installments upto Rs 100000 now. I have read reviews of yours regarding Jeevan Anand. Please suggest me what I should do?
I have monthly income of 34K in hand. Please also suggest me what % of my income should be spent for investments.
Also suggest me % division for the same.
Basavaraj Tonagatti
Varsha-If you are very much satisfied with kind of return around 6% then continue with this plan. If not then think seriously to come out as early as possible. Do you feel INVESTMENT as SPENDING? First differentiate between them. Regarding how much you need to save, it depends on individual. So there is no hard rule to say so. But only mantra is to save and invest more and more.
varsha
Sir,
Please suggest me how to back out from this policy with minimum loss.
Basavaraj Tonagatti
Varsha-You have now two options (if you completed 3 years), one is surrender the policy and second is to convert it to paid up. Visit to nearest LIC branch and decide which makes sense for you.
Mohammad
Hi sir, ur articles and replies are very good
I am 30 married no childern yet. I have a LIC jeevan anand with 35K PA investment and 10L return after 15yrs 6yrs done
I dont have any other policies or loans, My monthly saving after all expenses is around 30k
I have 9L cash from ancestral property share. what to do shall i take home loan and get a house or land or any other investment
Basavaraj Tonagatti
Mohammad-First try to dump that Jeevan Anand as soon as possible. Second buy term insurance to the tune of around 15-20 times of your yearly income. Build emergency fund of 6 months expenses. Buy health and accidental policy. Once they are at place then think about investing.
mohammad
Sir
I have paid 5 installments till now almost 1,70,000 but if i cancel i get only around 40ooo
i am feeling very bad abt it but how about the option of making it paid up as i read in some article
which is better termination or paid up
Basavaraj Tonagatti
Mohammad-I know it is hard to loose. But paid up may give an increased amount. Drawback of that too is, you can’t realize the amount now itself. So being cash of Rs.50 now in your pocket is more worth than being cash of Rs.100 after 15-20 years. Think and decide. I am not forcing you either way. You need to check it our financial health then go ahead.
J Chandra Sekhar
Dear Basav,
I am Chandra Sekhar aged 40 years.
I am having flat (self occupied) with a housing loan of Rs. 17.00 lacs (tenure 16 years – completed 8 yrs), having a car with a loan of Rs. 4.00 lacs (tenure 7 yrs – completed 8 months). I am paying total EMIs of Rs. 25000/- p.m. I am having LIC policies (Self & spouse), paying premiums of Rs. 5,000/- p.m. I am having two kids (daughter – 9 yrs and son – 6 yrs).
I can save in the range of Rs. 30 – 40 K per month (after all my monthly expenses). Kindly advice is it better to close my housing loan /car loan by paying additional funds or to invest in PPF / NSC / Mutual funds or a combination.
Note: My time horizon is long (more than 7 – 15 years)
Please advice .
Thanks
Chandra Sekhar
Basavaraj Tonagatti
Chandra-Which have more interest? Your loans or PPF/NSC/Mutual Funds? Try to first come out of the existing loans with whatever your surplus. But at the same time don’t forget to buy insurance (term insurance) immediately. Start investing for your retirement and kids education or marriage. After this if anything left then move that to towards loan.
Andy
Dear Basav,
I need your advice.
1. Have been investing in Reliance Golden Year plan from 2008 with monthly sip of 2000. I thought of using this for some long term goals(daughter higher studies or for her marriage..)
Current value is approximately 2.4 lakh (> 40% return)
Query: Shall I continue investing in this plan with the existing SIP value of 2000 per month?
OR
Should I exit the plan since the return is good (> 40% return) and Split and invest the amount in NSC bonds, FDs and PPF?
Please advice.
Basavaraj Tonagatti
Amdy-Do you feel Reliance Golden Year plan is best? Because the expenses are high (around 5% of your investment…apart from that some other charges also). You are claiming return is more than 40%. But check with your values. Not the value appreciation in UNIT. Check available units in your account and multiply that with current UNIT Rate. Then we discuss further.
Andy
This is the first time I visited your website. I read few articles and I would like to thank for your articles and advices you give.
Basavaraj Tonagatti
Andy-Pleasure 🙂
Raj Kumar Jena
Dear Basav,
I need your advice again. I am investing 70K on PPF, 19K on insurance(Bima Gold money back plan – its 7 year old plan) then from company I am getting 35K epf. so including all three, my saving was 124K every year. If I look for 150K tax savings then what should I do
1. Shall I increase my PPF amount ?
2. Shall I go for ELSS on SIP mode (I believe on SIP than lump sum investment)
Note: My time horizon is long (more than 5 years)
Please advice .
Thanks
Raj
amar
im married recently. i dont have kids yet.i want to buy a house in near future. i have planned for emergency fund also.so can u pls let me know ways to achieve my financial goals pls.
thanks for reply in advance.
Basavaraj Tonagatti
Amar-How about basic things like life, health and accidental insurance? What about the basic financial goal like retirement planning? Are all these are taken care by? If so then go for expensive goals like house.
Sreekanth Yelicherla
Very good article. Thought provoking
Basavaraj Tonagatti
Sreekanth-Pleasure 🙂
Srinivas G
My father is 63, a senior citizen. His yearly income (thru pension) is 5.8 Lakhs. He doesnt have any savings. Upto last year, 2013-14 he was in 10% tax bracket and paid Income Tax. Now with 5.8 lakhs he is in 20% tax bracket. Can u suggest me the best avenues for saving his tax considering his age ( atleast to the extent of 20% bracket taxable income ). He is not interested in FDs as they dont beat the inflation.
Basavaraj Tonagatti
Srinivas-At his age he must look at safety more than return. So I suggest him SCSS or to maximum he can go for around 30% of his investable amount to ELSS. But not more than that. That too with waiting period of more than 5-7+ yrs.
Sreekanth
It is always advisable to identify Financial goals first. Then choose financial products as per the time frame and your risk profile. Many investors opt for financial products just to save some tax. There is nothing wrong in taking the advantage of the available tax benefits. But it should not be the sole criteria to invest. Sadly, I have seen many choose products (esp insurance) just to save taxes.
Regarding real estate investment option through home loan. If one can identify a good property and invest in it at a very young age then it will create huge wealth in long term. This investment can be funded through home loan. But do not over leverage yourself.
Sreekanth (www.onlinefinancialplanner.in)
Basavaraj Tonagatti
Sreekanth-Thanks very much for your knowledge sharing 🙂
deepak
What rubbish. Any increase in 80C limit is welcome. To avail of this is optional, not mandatory. U dont have to invest extra 50k. But for those who are anyway investing into eligible products more than 1.5 lac or spending on children education more than 1.5 lac, etc; it’s definitely a tax saver and a boon. Its not a bane for anyone because its optional.
Basavaraj Tonagatti
Deepak-Thanks for your kind words 🙂 I agree that this optional is not mandatory. But do you feel people forget it so easily? They tend to utilize at any cost without doing their home work. For your information I have not raised the spending on children education in above list. Because it is mandatory and you can avail. But what about those who have no children and looking for tax saving of another Rs.50,000 at any cost???
Prabhat
Boss, Basavaraj is saying to identify your financial goals before investing for the sake of tax saving. Understand what he is trying to convey in the article before commenting. Just relax and don’t make any rubbish comments!!!!
Basavaraj Tonagatti
Prabhat-Thanks for endorsing my views 🙂