In Budget 2014-15, Union Finance Minister Arun Jaitley rolled out a gift to tax payers by offering additional deduction of Rs 50,000 under Section 80C. This was a good news considering the income tax benefits were not reviewed for a long time. Now under Section 80C, Rs 1.5 lakh can be claimed for income tax deduction. For many investors with higher incomes, this additional benefit may be taken care of but for most they will be planning to invest this additional surplus in reducing their tax liability.
Here is what to consider while planning for investing this additional sum of Rs 50,000:
For Long-Term Goals
The first priority should be to look at long-term goals. There might be a shortfall in contribution for achieving any of them. PPF, EPF, VPF and NPS are investments that help in meeting long-term objectives. The contribution to these accounts can be claimed as a deduction under Section 80C wherein the limit has enhanced to Rs 1.5 lakh. If there is a need to allocate more towards any of these then the additional provision of Rs 50,000 can easily be considered. Where exactly to invest is a decision that will rest on whether you have a shortfall for your retirement accumulation or some other goal.
For Short/Medium-Term Goals
The long-term contributions might have been fulfilled, but there would be some short or medium term goals that need additional contribution. There is tax saving Fixed Deposits, ELSS, NSC, Senior Citizen Saving Scheme (SCSS), where an investor can claim benefit under Section 80C. But all these options are not fit for all and so the selection should be done only after analysing the requirement. SCSS is a good option only for retirees, whereas ELSS can be considered for risk-taking investors though the long-term capital gains tax is completely exempted . On the other hand, interest from FDs, NSC and SCSS is fully taxable that investors need to factor in.
Insurance For Family Protection
Protecting your family from eventualities is the first aspect in financial planning. Many delay it even due to inability to claim any tax benefit on the outgo since other options have exhausted Rs 1 lakh limit. Now the additional provision of Rs 50,000 will help in taking this decision. If there is a need to buy an adequate life insurance coverage to protect one’s family then its time to go ahead. The premium outgo can now easily be claimed under Sec 80C. If term insurance is purchased then there will be a higher probability that even this Rs 50,000 may not be consumed fully. In that case, other options like ELSS can be considered since one may invest only for tax benefit.
With tax provision remained unattended for a long time, this enhancement was a welcome move for taxpayers. But to utilise this additional surplus optimally investors should make a selection after taking factors like taxability and personal risk in consideration. Most importantly, invest with a goal and not just for the tax benefit so that there is no mismatch between your expectation and the end result of the avenue you have chosen.
(The writer is a Sebi-registered investment advisor and founder of JS Financial Advisors)