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Use higher 80C limit to Invest in ELSS Mutual funds

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In effect, the ₹ 50,000 rise in the Section 80C limit will help individuals save anywhere between ₹ 5,000 ( in the 10 per cent tax bracket) and ₹ 15,000 (in the 30 per cent tax bracket).

Though my gross package is ₹ 20 lakh, my annual contribution towards Employee Provident Fund ( EPF) is pretty low. Last year, my annual contribution totalled ₹ 65,000. That time, I only had to take care of ₹ 35,000 worth of investments. This year, I will have to make investments worth ₹ 85,000. I am in a fix as to which 80C instruments to choose. Additionally, as employers deduct their portion of the EPF contribution from the employees salary, the amount you will get on deduction reduces by half, though your annual contribution looks big on the salary slip.

Last year, Kumar had invested ₹ 25,000 in a ₹ 5 lakh endowment policy and invested ₹ 10,000 in a bank deposit.

Many professionals across industries are facing this issue, say investment experts. They add this is the time when people will make incorrect investment decisions and lock their money in illiquid instruments.

How do you decide?  Start with assessing your expenses that will get exemption under Section 80C. Typically, these would be prepayment of a housing loan and tuition fee paid for child/ ren. Then, check the commitments you've already made. For instance, EPF, premium payment towards life insurance policy and so on. Now, decide on which instrument to pick ( from among those qualifying under Section 80C), according to you goal in life

The most popular instruments under Section 80C of the Income Tax Act are EPF, Public Provident Fund (PPF), life insurance, principal repayment of housing loans, fixed deposits (FDs) and equity- linked savings schemes (ELSS). However, most end up investing in all sorts of insurance products, like Kumar, complain financial planners. This is not the right thing to do.

EPF up to ~ 50,000

The best investment options for such individuals are term insurance (for those who dont have one), PPF and ELSS, say financial planners. As an individual is able to contribute less towards EPF or his retirement corpus, it makes sense for such a person to have a PPF account. This is for conservative investors. PPF gives 8.7 per cent annual tax- free returns, which no other debt products offer

At the same time, it will help enhance their debt portfolio if they dont have a decent debt exposure. Typically, a portfolio should have 2530 per cent exposure to debt, as it helps hedge the downside in a bad market. Such investors can also add bank FDs to their portfolio, which are giving 8.5- 9 per cent returns for a year. However, the capital invested will be exempted from tax but the interest will be taxable at slab rate.

The other view is: Those who are 40- 45 years of age and have no other investment under 80C, other than EPF, should buy a term cover of up to ₹ 50 lakh ( annual premium of ₹ 8,0009,000), if they don't have one already. This will take care of roughly ₹ 60,000. Invest the remaining in equity.

You will get a neat retirement corpus, much more than what you'll get from PPF, If one starts a ₹ 4,000- 5,000 Systematic Investment Plan ( SIP) in an ELSS scheme and earns even 12 per cent ( a conservative estimate), the person is likely to triple his investment amount. With PPF, he is only likely to double his money." If a 40- year old invests ₹ 5,000 a month for the next 20 years, he will have a corpus of ₹ 49.50 lakh, as against a total investment of ₹ 12 lakh (at the rate of 12 per cent annually). If he invests the same amount in PPF every month, he will get back only ₹ 18.50 lakh. As equities are known to perform over a very long term, these are the best bet when seen in the backdrop of inflation indexation of around 10 per cent. This number stood at six seven per cent three years earlier.

This investment will also hold good for individuals ( in their 40s and late 30s) who want to save for their children's education 10- 15 years down the line. If a 40- year old invests ₹ 5,000 a month for the next 15 years in ELSS, he will have a corpus of ₹ 24.97 lakh, as against a total investment of ₹ 9 lakh (at the rate of 12 per cent annually).

This apart, equity has the lowest lock- in period compared to all other products qualifying under Section 80C. ELSS has a lock- in of three years, lower than the six years for PPF, five years of a tax- saving FD and even higher for insurance- cum- investment products. Also, keep in mind that insurance cum investment products will be taxed on maturity from this year; they come under the EET ( exempt exempt tax) regime.

Term plans come under a EEE (exempt- exempt- exempt) regime.

Taking into account your horizon for retirement. If your retirement is 10 years away or more, opt for ELSS. Otherwise, divide the money between ELSS and PPF.

Those less than 10 years away from retirement should invest in PPF only if they have an existing account. Otherwise, the product is not viable with its long lock- in. Avoid small exemption like that for children's tuition fee, as it is way too less to claim.

Some might argue that they would be better off prepaying their home loans and claiming deduction for it. While that's not a bad idea, investment is always better for you as it earns a return on your money. Also, the ratio of rise in property price and rise in loan rate is not proportional. Then, you anyway get a tax benefit for repaying the loan – a portion of the equated monthly instalment (EMI) goes towards principal repayment under 80C and the rest towards servicing the interest portion. So, there should be no hurry to repay that.

Instead, use the profits from the investment you make today to prepay the loan at a later stage. Even today, prepay home loans only if you have profit surplus, he says; most youngsters have very little investments for the future.

Prepaying a home loan will impact your EMI only marginally in the initial years. A better way to prepay could be using small amounts to do the same every month, over and above the regular EMI.

Of course, those near retirement and still repaying a housing loan would be better off prepaying than saving. It is assumed that such individuals will have some form of savings for near- term goals like retirement, children's needs and health insurance.

EPF up to ~ 1 lakh

For such individuals, the remaining limit is not much – only ₹ 50,000. So, take a call based on your age and long term goals. As mentioned above, those below the age of 40 or 45 years will be better off investing in ELSS and not only earning from tax benefits but also from high returns.

Those above 45 years of age may opt for both, hedging with a debt product –PPF – and earning from ELSS. While those at the beginning of their career have a high risk appetite, those at the end of their career can also look at diversifying through equities, as their other needs — life/ health insurance, retirement corpus, children's requirements — are mostly taken care of by then. And, it is even more imperative to invest in equities for those in the middle of their career, as they are fast approaching the end of their career and need savings for various goals .

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