Many salaried people look at tax saving investments starting only from November or December, because around this time their finance department will be sending out reminders to them requesting for investment details to even out the final deductions from the salary.
Some others start looking at the investments as late as March! So is it ok to make tax planning investments at the end of the year? This article will address this question.
Situation at the end of the year
Life insurance companies launch over 80% of their new products and get about 75% of their annual sales during the 'Tax Planning Season' -- December to March of any year. In recent years it has also been noticed that the sales of health insurance products is at an all time high during this season.
This is with the awareness that there is a tax benefit from paying premium for health insurance too. This confirms that the majority of Indians plan their taxes during the end of the year!
Borrowing for investing!
In certain cases when planning for tax saving investments, the investor even borrows money! Sometimes they pledge their gold jewelry or even pay 2% per month as interest for making these tax saving investments. Such practices become counterproductive, as the actual tax saved in almost all these situations will be lesser than the interest paid!
Charges forgotten in the rush
Often, the investor forgets to check the kind of charges applied for the investment. One banker sold an insurance product for tax savings that carried a 100% charge in the first year. The loss for the investor the entire Rs.1 lakh that he invested!!
Cost averaging lost
Most of the current day tax planning investments have a component of the stock market -- almost all have realized that the NSCs that mature with double the investment in 8 years and 7 months and the 5 years bank deposit with 8% interest do not even make up for inflation.
When making a single lump sum investment in the stock market, timing becomes very important. January to March or for that matter no particular month by any statistic is proven to be the best month for lump sum investment! Regular investment on a monthly basis is the best bet to tap the benefit of cost averaging!
By making a regular investment the investor is a winner when the market is going down (she can buy more units or shares) and when the market is going up (the entire holding/investment grows).
Advantages of tax planning at the start of year
More time for planning
a. Products that match requirement
One gets the time required to choose the product that matches with his/her requirements. With competition increasing, companies are making their creative muscles work longer in creating products that address unique needs.
Today we have financial products that are custom made for women, a just born child, senior citizens; products for people who cannot leave office, who are always in the field; products with 100% and also 0% charges ; products which give guaranteed returns and those that guarantee NAVs during a period, and those that go purely with market returns. Making the choice requires time. This much needed perishable resource (time) is least available at the end of the year.
b. Time to compare products across companies and categories
Having identified the product category, one needs to compare different products that are available in the market from different companies. This again requires time. Most companies in India today have products that charge very high and those that charge very less.
They also have products that guarantee returns (such plans give very low returns [7 to8%] as the investment has to be predominantly in debt) and those that do not guarantee returns (these plans cannot guarantee returns as the investment is in the stock market.
However it is a proven fact that among financial products the stock market gives the highest returns in the long run).
Again planning at the beginning of the year will one enough time to analyse the products and make wise decisions.
Cost Averaging Benefit & Reduced Burden on Wallet
Instead of making one big investment in, say January, it is better to make a series of 12 investments starting from April itself. This give one 2 benefits - cost averaging as discussed earlier and also the burden on the wallet is lesser. Is it easier to make one investment of Rs 12,000 or a monthly payment of Rs 1,000?
Tax planning investments at the end of the year, negate the very purpose of investment, hence its prudent to plan when the financial year begins to make the best choices and get the best benefits.