Last-minute tax saving tip: Tax-breaks are important, but prioritise your financial goals

Your investment decisions should be objective, need-based, with the additional kicker of tax incentive.

This is March and people are busy making last-minute tax saving investments to meet the fiscal-end deadline. Today we will discuss a different approach to this.

To start with, you have to choose between two tax regimes – old and new. The existing or old tax regime has exemptions; you can invest in those avenues and reduce your tax outgo. And there is a new tax regime where the tax rates per se are lower but exemptions are not available. As of today, both the old and new regimes co-exist. It is your choice under which one you will pay your taxes i.e. claim exemptions and pay tax at relatively higher rates or forget exemptions and pay tax at a relatively lower rate. From the government’s perspective, the new regime is the “default” regime, you have the choice of the old one.

The tax regime of the future

When we look at the changes in tax regulations, there is a trend visible. The government is gradually disincentivising tax efficiency as the driver for investments.

Unit-Linked Insurance Plans (ULIP) premiums beyond Rs 2.5 lakh per year have been made taxable. Insurance (conventional/endowment) premium payments beyond Rs 5 lakh per year have been made taxable. Indexation benefit on debt mutual fund investments has been done away with.

It is possible that somewhere down the line, though nobody knows as of today, tax saving investments, for example, Section 80C may be done away with altogether. To reiterate, the new tax regime is a “default” one. These developments indicate that this is the preparatory phase to prepare ourselves for the eventuality.

Also read | Last-minute tax planning: Your checklist for the end of a financial year

Financial goals > tax savings

Your investment decisions should be objective and need-based, with the additional kicker of tax incentives.

Tax savings should not be the sole motivator for the decision. If tax efficiency is the sole driver, then your decisions are not really objective. Your decisions should be more mature, and you have to gradually develop that mindset and approach. Buy insurance, because you need it, not because of the tax breaks. When you buy insurance for your car, it is not for tax benefit but because it is required. Buy term insurance, rather than ULIP as that is pure insurance whereas ULIPs combine insurance and investments, at a higher cost to you. That is, do what is practically better for you.

Buy property, because you want to stay there or you want to own a second home, not because of the tax breaks. Invest in debt mutual funds, not because of the tax rate, but because you require it in your portfolio. Invest in equity stocks/equity mutual funds, not because the tax rate beyond one year of holding is 10 percent, but because you want to participate in the India growth story.

Once you de-clutter your mind from the tax efficiency aspect, you will be able to take a pure, undiluted view on why you have to spend your money on a particular investment.

Also read | How to use EPF, PPF, and NPS (G+C) to handle the debt side of your long-term portfolio

The new approach

When you think of it from this perspective, you will appreciate the approach. The connotation of the Public Provident Fund (PPF) is that investments up to Rs 1.5 lakh per financial year lead to tax savings. That apart, this is a very safe deployment, even safer than bank deposits, as it is run by the government. The rate of interest is fairly attractive, given the level of safety. The point is you may not be consciously aware of this till you think from this perspective.

NPS Tier 1 is perceived as something that can give an additional Rs 50,000 of tax saving investments. When you look at it objectively, you will get a better hang of the pros and cons of NPS Tier 1. When you buy a regular premium insurance policy, it should be one you would be happy to pay the premiums, even without tax efficiency, if the eventuality befalls us sometime in future.

Equity Linked Savings Schemes (ELSS) of mutual funds have performed well over a long period of time, you may compare this objectively with other fund categories like large cap or small cap or ETFs, as a gauge.

Also read | How to open an NPS account online, claim deductions of up to Rs 50,000

Conclusion

So far so good, you are taking your investment decisions today as per today’s situation, including the tax aspect. If the eventuality were to happen – no one knows if it will – usually there is a ‘grandfathering’ clause. New tax laws are usually made effective after the cut-off date, which is notified. On rare occasions, for example, the change in tax laws for Market Linked Debentures being treated as Short Term Capital Gains, effective 1 April 2023, was made applicable to existing investments as well. Keep on availing the tax benefits, with a second line of thought mentioned earlier.