Unnecessary investments in insurance products to save tax can cost you dear in long-run

It is a story that is told innumerable times during the first three months of every New Year. Financial advisors of every hue would recount horror tales of how individuals who rush for 'last minute tax planning" end up with an investment portfolio of "wrong products" that doesn't serve any purpose. However, the moral of the story seems to have had no desired impact on the audience.

Most financial advisors claim that the ancient practice of last minute rush is going on even this year, too. Typically, they end up buying insurance products, as insurance companies are most active during this period. In fact, most of their business comes in the period of January to March.

As you might have guessed already, "wrong product" in financial parlance means an insurance product and financial advisors often claim that most buyers are saddled with these products — ranging from term plans to unit-linked products to pension products — forever as they have no idea how to take remedial actions. The main trouble with most of the insurance products is that these are costly and are also long-term products.

It is equally painful for clients because in some cases they will lose money as most insurance products wouldn't make money in the first few years because of charges deducted upfront from the premium, and they also have to forego some more money because of surrender charges.

PERILS OF THE FRIENDLY ADVICE

The trouble begins when someone shops for tax-saving instrument in a hurry. If he/she walks into a bank for a 5-year fixed deposit that would fetch deduction under Section 80C, the bank official would start talking about a product that gives assured returns plus lot of extra things that an FD doesn't offer. If it is not a bank official, a neighborhood investment expert is always there to sell an insurance product with a very small cover because it would fetch him/her a better commission. (Please, go through my early post know your financial advisor)

Investment experts say most individuals go blindly by what the sales person says and they don't even bother to cross-check the basic facts. "Since they are in a rush, they don't actually have the time to get into the details. They are mostly happy that their tax-planning is done for the year.

Passport re-issues timeline

I had been to the Passport Office thrice in the last one month. Before heading to the Office I had my usual preconceived notions about Governmental Bureaucracy.

Quite to my surprise, after dropping my application and that of my Parents, I received my re-issued Passport as well as my Father’s Passport in about 8 to 10 business (working) days. Considering the fact that I made a normal application and our Passports were valid (i.e. not expired).

Point is…if you are in real hurry (i don’t know how you might end up in such a situation), you can opt for Tatkal and the Passport will be (re)issued to you in about 2 weeks’ time frame (or earlier). 

Based on my personal experience, I received my reissued Passport (i.e. renewed for another 10 year period) within 8 working days (spread across 2 – 3 weeks). More or less, it is wise to use the normal application as you pay INR 1500 less (at the time of writing this).

Please follow the instructions listed on the Passport India website. It is pretty much self-explanatory. As an additional information, if your (about to expire) Passport has been issued by an out of region Passport Office (say, abroad), it still takes about 10 working days (about 3 weeks) to get the reissued Passport.

NOTE: For some reason the word renewal is used by the Ministry of External Affairs to indicate the renewal of passport for the next nine years after an emergency passport was issued for a short period of one year. That service is done on a free-of-cost basis.

Tidbits: Apply for Passport re-issuance at about 8 months ahead of its expiry date. Most of the countries expect at least a Passport that is valid for six months. If you are out of Country (say, abroad), I think you can factor in the processing time at the nearest Embassy/Consulate.

Fresh Passport Applicants can check this link if they prefer to submit the Police Clearance Certificate along with the application.

More is not always better while investing to save tax

Most salaried employees are running around to make last-minute investments to save income tax and provide the proof of investments to the employer. This is because most companies ask their employees to submit the proof of their investments in January to avoid deduction of higher taxes from the salary.

Last minute tax planning is an age old practice that forces tax payers to make hasty, and often wrong, decisions. Typically, some individuals invest more than the required amount to save taxes. They also end up parking money in wrong products in the process, which may have an adverse impact on their cash flows and return prospects.

It is not surprising that the insurance industry do most of its business during the tax- saving season between January and March every year. "Often we tend to buy products or make investments without doing the due diligence on our total tax structure.

Having a tax plan in place at the start of the financial year will help you make better decisions and even reduce the burden on financials at the end of the financial year," says Nitin Vyakaranam, founder & chief executive officer, Artha Yantra, a financial planning firm.

A SMALL 80 C BASKET

Tax planning is all about Section 80 C for many individuals. They believe they are claiming all tax break if they invest Rs 1 lakh in some of the usual investment tools like public provident fund, national savings certificates, tax planning mutual fund scheme and so on.

But what tax payers don't account for is the employees' contribution to provident fund, children's school tuition fees and the principal repayment of housing loans also qualify for tax deduction under Section 80 C, which is capped at an overall limit of Rs 1 lakh.

If you invest anything over and above Rs 1 lakh in ELSS, life insurance, PPF or NSC, it does not give you an extra tax benefit. It is just that your money gets locked in for a certain period which can range from 3 to 15 years in the above mentioned products.

For example, EPF contribution and life insurance premiums are covered under Section 80C apart from the principal repayment of housing loans. That means most regular employees can invest only a few thousands extra under Section 80C.

For example, if your EPF contribution is Rs 5,000 per month, it would exhaust more than half of Section 80 C. Add your life insurance premium and you will know how little you can save under the section.

"Typically, your existing investments would include your contribution to EPF, life insurance premiums, housing loan repayment, stamp duty and registration fees paid, children tuition fees, etc.

If the sum of all these exceeds Rs 1 lakh, then you don't need to invest further as the deduction is capped at Rs 1 lakh," says Vaibhav Sankla, director, H&R Block, India. However, if the sum of your tax-saving investments is less than Rs 1 lakh, then you may consider investing the balance amount for additional tax benefits.

For example, if your existing investments are to the tune of Rs 60,000 then you can still make additional tax saving investments of Rs 40,000 (Rs 100,000 minus Rs 60,000).

"But the tax saving on the additional investment would be Rs 4,000 only. In such cases, many tax payers would rather opt to pay income tax of Rs 4,000 than blocking Rs 40,000 in a tax-saving scheme," says Sankla.

Courtesy-http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/more-is-not-always-better-while-investing-to-save-tax/articleshow/18027366.cms

Some investment options in 2013

  Gold or Silver:

Since the rupee is expected to appreciate this year, it's time to curb your investment in gold this year. Opt for investing in silver instead as a short-term investment. If you want to stick with your investments in gold, limit your overall investment to be 5 to 10%.

Property:

Growth this year in the main metropolitan property values are expected to decline or roughly remain the same. Focus on investing in tier-2 or 3 cities which have more potential to grow.

Equity:

Investing in equity can be quite tricky and volatile. Stick with equity if you are planning to invest long term.

Debt mutual funds:

These mutual funds invest primarily in negotiable certificates of deposits or corporate deposits. When interest rates decline, this is probably your best bet for an investment.

Large cap mutual funds:

Investing in a large cap mutual fund can give you quick returns within 1 to 3 years as there is very less share market downtrend.

Just keep it in the bank:

Investing in top fixed bank deposits can give you some really good annual returns. Interest rates are at their peaks and you can gain up to 9.25% interest on your investments.

Happy investing!