The earlier the better it is for investing in tax-saving instruments
You would be thinking, we just got over one tax ‘season’ viz. March 2021. Why talk of the next season right now? Well, the earlier the better. You get more time to plan, execute and revise your plan.
It is a mindset that when we have a deadline for, say, submission of a form or filing a tax return, we take the last date as ‘the’ date for doing it. The fact is, time is up to the last date and delay is not desirable unless there is a reason.
For example, if we have to pay a fine or penalty by a certain date, there is a reason to delay it to the deadline as we can earn interest up to that date. However, for tax-saving investments, it is the reverse: earlier the better.
To clarify, tax-saving investments are investments, not expenses. If you visualise it as expenses, you will have the urge to procrastinate. The difference between the two is that expense is a current consumption in exchange for money whereas investment is deferring your consumption so that you get a higher amount of money later, which is called returns.
Lower tax outgo
Under section 80C of the Income Tax Act, the deployments you make are not only investments that will fetch you a higher amount later, but these have the additional benefit of enabling you a lower tax outgo, which means, effectively, even-higher returns. Since this is counted per financial year, from April 1 to March 31, many people visualise March 31 as ‘the’ date and March, as the time to wake up. Let us look at the benefits of starting early in the financial year:
Compounding: returns on your investments get compounded. Hence, if you start in, say, April instead of next March, you get one more year of returns and compounding.
Cash flows: if you are executing 80C investments in March and not earlier, it may burden your cash flows.
Discipline: if you are doing it in a planned manner, you will not miss out on anything.
Cost averaging in equity: SIP leads to averaging out your cost of investments. Your investments in ELSS funds can be executed through a monthly SIP.
We will now look at some of the options under section 80C, in light of the now-or-later proposition:
EPF: for salaried people, contributions towards EPF are deducted every month. Hence, it does not become a burden towards the end of the financial year. The employee gets credit for the interest for the entire year, which is the highest tax-free rate of interest. If it were deducted and deposited towards the end of the financial year (this does not happen, just for the sake of discussion), the employee would have missed out on the attractive interest for the year.
PPF: interest is calculated on the minimum balance in PPF account between fifth and the end of each month. Hence, if fresh deposits are made after fifth of the month, you miss interest for that month on that quantum. PPF offers handsome, tax-free interest; you can avail of higher returns by starting early in the financial year.
ELSS: your investments in equity linked savings schemes (ELSS) of mutual funds should be seen as part of your overall equity allocation. The way your investments in equity funds (or even debt funds, though not for tax saving) are executed in a calibrated manner through SIP (systematic investment plan), the same should be done for your tax-saving ELSS investments as well.
Home loan: the principal component of home loan is eligible under section 80C. Since EMIs are paid every month, there is no scope for procrastination and it happens in a disciplined manner.
Others: there are other investment avenues under Section 80C viz. National Saving Certificates (NSC), Life Insurance premium payment, Senior Citizens Savings Scheme (SCSS), etc. Insurance premium payments are time bound, which makes us disciplined in paying them. For other investments like NSC, SCSS, etc., the logic discussed earlier holds good: the earlier the better.
Conclusion
Ideally, you should take professional help in shaping your personal finances viz. take inputs from a financial planner. There are other ways of making your investments tax efficient i.e. it does not lead to tax savings as such but your tax outgo on your returns may be relatively less by proper planning. Section 80C investments are a straightforward and an obvious way of saving taxes, thereby making the whole proposition more attractive.
For a calibrated execution of 80C investments, you do not need much of cash outflow. On the outer side, it is ₹1.5 lakh divided by 12 = ₹12,500 per month. However, most people will have EPF contributions (for salaried people) and Life Insurance policies. Only the balance, less than ₹12,500 per month in, say, PPF or ELSS needs to be scaled over the year.
(The writer is a corporate trainer and author )
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