Attractive plans to save tax!

It is that time of the financial year, when tax payers start getting active about investing in Section 80C instruments. Since, the limit is up to Rs 1 lakh per person, both insurance companies and mutual funds start launching schemes to attract investors.

However, investing this amount blindly is not the best way to go about it.

Typically, most people invest a large part of the money in Public Provident Fund (PPF) and the rest is taken care of by life insurance premiums and so on.

For someone, who has not started so far, here's some help on how to go about allocating this 80C limit depending upon your age.

Let's look at the options first. There are two options that you have

Investment

Non-investment oriented

The Investment options would comprise of the following.

Employee Provident Fund (EPF) and Voluntary Provident Fund(VPF)

Public Provident Fund (PPF)

National saving certificates (NSC)

Bank deposits

Life insurance premiums

Equity linked saving schemes (ELSS)

Pension policy premiums

Pension schemes of mutual funds

Senior citizens' savings schemes (SCSS)

The non-investment options would include:

Home loan principal payout

Children's school and college fees

So how do you decide which 80C option to go for? For the employed, it's important to remember that the contribution that you make in the EPF qualifies for the overall limit. So, only the gap has to be invested prudently.

Age 21-30: In the initial phase of six-seven years of this age bracket, most people are single and little or no dependents. If there are no dependents, it's not necessary to have a large life insurance.

Instead focus on returns. Considering the state of the equity markets today, a substantial portion around 70 per cent to 80 per cent of the 80C contribution can be made in ELSS, which invests primarily in stocks. This will ensure that you have started the process of investing for the long term. Also, since there is a lock-in of three years for these schemes, it will lead to a forced savings. When choosing an ELSS investment, look at consistency rather than a one-off performance. Go for fund houses that have a good track record over a long time period.

The balance can go into VPF. That is, you can ask the human resource to cut a higher amount from your salary for VPF. The employer will not match this additional contribution, as in case of EPF. But the returns are higher at 8.5 per cent vis a vis 8 per cent in EPF.

Age 31-40: By this time, you are expected to be married with small children. Also, there could be additional liabilities like buying a house or car.

The first step that must be taken is to get life insurance, for dependents and liabilities. Make sure you cover all your liabilities so that dependents are not under any financial pressure, in case of an unfortunate mishap to you. Use a term plan to get the highest possible cover at a low cost.

The home loan principal payout can form the second leg of the contribution for this age group. So, besides EPF contribution, life Insurance premiums and home loan principal should be sufficient to take care of the entire Rs 1 lakh requirement. If there is still any shortfall, look at ELSS investments and VPF.

Age 41-50: You are probably at the peak of your career or moving towards it. Even children will be reasonably grown up. You would be paying college fees that can be included as a part of the 80C benefits.

The last few years of this phase is when a lot of families plan and should retire their loans.

It is also an age where life insurance is of extreme importance. Re-evaluate your need for life cover at this point of time. If you need more, increase it substantially.

Also, lifestyle diseases, small illnesses and stress are taking a toll on many families in this age group. Hence, risk management is of extreme importance here.

Once again, after you are well-insured, look at ELSS and VPF as the two instruments to park the balance. The exact contribution to ELSS, VPF and PPF is a function of your risk taking measure, expected returns and liquidity needs.

Age 50-60: This is most likely the final phase where you earn a regular income. There is a good chance that loans have been paid-off by now and children are in the stage of becoming independent.

In this phase, you must contribute as much as you can towards VPF. This is because it has maximum liquidity and you could withdraw these tax-free funds (as you would have completed the mandated 5 years). If you do not have VPF, go for PPF first and then invest the balance in ELSS.

Senior citizens: In this age group, capital protection and need for regular income are two most important needs. You must first opt for a Senior Citizens' Savings Scheme that will give you this benefit.

Since SCS is generally parked in a lump sum, look at fixed deposits only if they are giving you high interest rates. If interest rates are low, then you should opt for PPF, if you are in the highest tax bracket as liquidity is still the best (your account should have completed 15 years a long time ago) and you can withdraw tax-free amounts comfortably.

A minor portion, around 10-15 per cent, of your investments can go into ELSS, as it has the ability to beat inflation and give you growth in funds. However, do this only after you have secured your income needs.

The writer is director, My Financial Advisor