investments are out in full force.
For most part, this means insurance companies and their Ulips.
There was a time when tax saving used to be driven by
accountants asking salary-earners to invest in
National Savings Certificates.
That option is still open, but the sales pitch has been taken over
by tele-marketers extolling the virtues of Ulips from at least January
onwards. In fact, the calls actually started in December this time.
The reason was that from January 1, new expense rules meant that
only newer, lower-cost Ulips could be sold.
Therefore, the insurance industry made a special effort in December
to ensnare as many people as possible in the older, higher-cost Ulips.
Anyhow, the real problem is that many of us are still not planning
our tax-saving savings systematically, which is what leaves us
scrambling for options at this time of the year.
As a result, I find that for tax-saving investments,
we tend to think about tax first and investments later.
As long as something saves tax, its characteristics as an
investment are paid less attention to. Much of the time,
waking up late to these investments means they are chosen
more for their convenience than for their suitability as investments.
The time to plan tax-saving investments is much earlier in the year.
In February or March, it’s much more likely that you will make hasty decisions.
When you evaluate tax-saving investments as investments,
the most important parameters are returns, safety and liquidity.
On safety, government guaranteed systems like PPF and the NSC score,
but they have the longest lock-in. Given the mandatory lock-in of tax-saving
investments, it makes sense for most investors to concentrate
their investments into ELSS or equity-linked saving schemes of mutual funds.
There are other options that give equity-linked returns — Ulips
and the new pension system. Of these, Ulips have a long lock-in —
at least 10 years — coupled with high costs and poor transparency.Moreover, investors have to commit to continuous payments for a
certain period; if they can’t keep up, then the effective cost shoots up
to a ruinous level.
The money that you put into equity tax-saver funds is best spread out
over the year in an SIP. At the end of the year, you could end up catching
a high point of the market.
Anyhow, whether that happens this year or not, it’s still not too late.
Given the volatility in the market, you could still do some cost-averaging
to be on the safe side, perhaps by breaking up your investment into
three equal parts till March 31.
On a different note, there’s a piece of
bad news for honest and regular tax-payers who were looking forward
to the Direct Tax Code. The draft DTC was released by the government
last year. Although the document had some rough edges, its thrust at
simplicity was refreshing. However, things are not looking so bright for
the new code now. Within the government, there seems to be a lot
of rethinking on the DTC.
My belief is that within the government and the bureaucracy,
as well as in the accounting profession, there are a lot of vested
interests who don’t welcome simplicity.
These people’s livelihood and influence depends
on the taxation system being complex and open to abuse,
and they will fight hard against its simplification.
I hope their efforts fail. But at the moment,
things don’t look very good.
Dhirendra Kumar
is CEO of Value Research India.
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