Suhrud, 33, and Atul, 34, are childhood friends. Suhrud is now a doctor and Atul, an engineer, works for an information technology company. As the fiscal year was coming to an end, they both felt they should make tax-saving investments under section 80C. “Which insurance should we buy to save tax?” was their first question when they met me.
Veer Sardesai, CEO, Sardesai Finance, & CFP
I knew it was that time of the year when a lot of people get the tax-saving bimari. “I thought you had already had the required insurance,” I said. “Of course, we have enough to provide for our family in case of our demise,” replied Atul. “We just want to save tax,” added Suhrud softly. “What happened to the policies that you bought over the last seven to eight years?” I asked. “Oh, some are going on, others have lapsed. We don’t really need the insurance you know,” said Suhrud.
I smiled. “You will need to make additional payments to get the lapsed policies reinstated. It may not be possible to reinstate some of these policies and, hence, the invested amount would be lost. In case of the current policies, you are paying for insurance that you do not need.
“Tax planning is not about saving tax. It does not make sense to save Rs30,000 by spending Rs1 lakh on a product that you do not need. That way you would waste Rs70,000. Insurance is essential for most of us but it has to be purchased as a calamity protection. You must identify the appropriate insurance amount you need and purchase the same. Tax benefits are just a bonus. Do not mix insurance with tax planning. You must focus on maximizing your post-tax yield. Look for products that will help achieve this goal. The post-tax return on insurance policies is lower than on pure investment products. This is because they carry administration and mortality charges for the insurance cover they offer you.”
“But I thought one of the biggest advantages of investing in life insurance policies is that the complete maturity amount is tax-free. Thus, we save tax not only at the time of investing, but also get completely tax-free returns after maturity,” said Atul. I said: “It is true, but returns from equity-linked saving schemes (ELSS) and Public Provident Fund (PPF) are also tax-free. In fact, both these have better post-tax returns. This is because they have much lower charges than an insurance plan. If you are looking at retirement planning, ELSS will give you better returns than an equivalent unit-linked insurance plan (Ulip), though returns from both the instruments would be linked to the stock market’s performance. If you are not keen on undertaking the risk of equities, then invest in PPF which offers assured safety to your capital and a guaranteed tax-free return of 8%. On a risk-adjusted basis, returns from both these investments are likely to be better than Ulips or other insurance policies.”
Looking convinced, they asked, “So, what should we do?”
“Atul, you are a salaried employee so your PF contribution along with your home loan principal repayment will be included under 80C. In addition, any genuine premium will also be included. These amounts themselves will be close to Rs1 lakh. Any shortfall could be made up by using an ELSS. On the other hand, Suhrud, apart from your genuine insurance premiums, you can invest up to Rs70,000 in a PPF account and the remainder in an ELSS,” I advised.
Both smiled and left, hopefully cured of the bimari!
Veer Sardesai is CEO, Sardesai Finance, & CFP
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