How a salaried individual can maximise tax savings by investing in NPS
My annual salary is ₹16.5 lakh. I have invested a maximum of ₹1.5 lakh in tax saving options and also purchased health insurance for my family but my tax outgo is still very high. How can I save more tax?
-Name withheld on request
If you have exhausted the ₹1.5 lakh tax saving investment limit under Section 80C, you can save more tax by investing in the National Pension Scheme (NPS). There is an additional deduction of up to ₹50,000 under Sec 80CCD(1b) for investment in the pension scheme. If you invest ₹50,000 in the scheme, your tax will get reduced by ₹15,600.
The NPS offers a choice of four classes of funds and allows the investor to define his asset mix. If you are unsure of how much to invest in different asset classes, you can opt for any of the three lifecycle funds (aggressive, moderate and conservative) that invest on the basis of your age. The NPS also offers investors the flexibility to change the asset mix and even the pension fund manager.
While the NPS helps save tax and is a good option to save for retirement, keep in mind some of the features of the scheme. It has a very long lock-in. The money cannot be withdrawn before retirement unless there is an emergency. Even on maturity, the investor gets only 60% of the corpus. The balance 40% of the corpus has to be compulsorily put in an annuity to earn a monthly pension.
I am 46 and want to start investing in equity funds, and have shortlisted four 5-star rated funds, namely Axis Bluechip, Axis Midcap, Canara Robeco Emerging Equities and Canara Robeco Flexicap. I intend to begin with an investment of ₹1 lakh in each of them. Is my choice of funds fine or do I need to make changes?
-Name withheld on request
Your choice of funds is good, as all four of them have performed very well and are highly rated by mutual fund tracking agencies. However, your method of investing needs to be reviewed. Instead of putting a large amount at one go, start SIPs of ₹10,000 in each of these four funds. Markets are looking quite overvalued right now and could correct in the coming weeks. Lump sum investments at this stage could well lead to losses and make you turn away from equities. Staggering the investments through monthly SIPs will help diversify your risk over time and average out the cost of acquisition if markets recede.
As a new investor in equities, you need to keep a few things in mind. For best results, investments in equity funds should be for the long term. If your investment horizon is less than 3-4 years, you should not get into equities. Also, don’t get disheartened if your investment dips into the red. The SIP mode delivers the best results when markets dip and you get to buy more at lower prices. Terminating SIPs in down markets is the worst mistake that small investors make.
Raj Khosla is managing director at MyMoneyMantra.com. Queries and views at email@example.com