Treat tax-saving as investment, not as a perfunctory annual ritual
Seeing is believing, they say, of the amazing wildebeest migration from Serengeti to Masai Mara. An estimated 1.3 million wildebeest participate in this migration, apart from 2 lakh zebras and other animals. Crocodiles lay in wait underwater, big cats wait across the river and hyenas chase and hunt young wildebeests. Reminds me of another landscape we are familiar with...We have a stampede in the December-January period to complete tax-saving investments (Rs 1 lakh under Sec 80C). Saving tax is almost a pathological obsession. This holds so much significance to the tax payers that it has become a national obsession to hunt for schemes which "save tax" and complete the formality. The search is so single-minded that many lose track of the larger picture of investing wisely. We work for money. We never tire of talking of "hard earned" money. But we seem to invest without doing our homework. Just like in Masai Mara, there is an equally colourful & eclectic mix of crocodiles, big cats and hyenas to prey on the unsuspecting investors.
The agents/ advisors (some are called financial consultants too) have colourful brochures illustrating how the investors' monies have grown in the past several years. In spite of specific prohibition by the Insurance Regulatory and Development Authority (Irda) to desist from showing returns of over 10% in illustrations, there are many who will precisely do that, to give you the "real" picture. The 10% illustration is too bland and not evocative enough.
That of course must be truly enticing, going by the number of people who reach for insurance policies (mostly unit linked insurance plans, more popular by the acronym Ulips) for tax savings. Their decision making is of course egged on and eased by the goodwill gesture of cash gifts from the agents/advisors/consultants, for buying insurance policies through them. Investors are all for this - they get great returns, save tax and get some upfront cash too. It doesn't get better than that. Or, does it?
Reality hits them later, when they see the unit statements, in due course. They want to get out then. Many have come to me saying they were not aware of such usurious charges, nor the steep surrender charges. They then understand why the agent gave them the cash gift. It was a honey-trap.
Insurance plans are not the only point where investors falter. They are also bowled over by pension plans. Pension is a concept that talks to their deep-seated desire to get a monthly paycheque after retirement, is an assurance of security in their old age and a guarantee of 'sar utha ke jiyo'.
There is only one problem, however. The annuity they will get is taxable. No one mentions it to them, of course, and pension policies are a hit. No one tells them that once pension starts, they cannot get back their accumulated corpus either. Also, they also forgot to mention that the same pension can be structured in many other ways - like even through the other favourite — Ulips, whose maturity proceeds are tax-free — or that the pension could as well be arranged if one invested and accumulated wealth through the Public Provident Fund (PPF), equity mutual funds or direct equity.
Tax at maturity is a problem with National Savings Certificates, bank fixed deposits of five years or more, too. Talking of tax, investors have other options to invest, to save tax and regret at leisure. There are single premium policies which offer a life cover of five times or more in the first year, which falls to 2 times or less from the second year or later. So what's the big deal in this? Besides, as per Irda directive, the maturity proceeds become taxable if the sum assured falls to less than five times the premium, anytime during the policy term. That means, most of the single premium products which are being sold now will all be taxable. Was this made clear to them? Nope. Investors are not even aware that, there is such a catch.
I have read that 1/8th of the wildebeest do not reach the other side alive - a very sobering thought indeed. The toll among investors could match that - maybe worse.
What can investors do? They could simply invest in PPF or equity linked savings schemes of mutual funds - at least, they do not have to pay the charges, which are substantial in the initial years. Also, in these cases, it is a one-time payment — not a liability to pay for several years into the future. They save tax in the year of payment and do not create a tax liability on maturity. They could also prepay home loans (if they have one), for the principal amount so paid also saves tax under Sec 80C.
The great wildebeest migration has been happening for millions of years. And this is not even the only such spectacular migration. Monarch butterflies - hundreds of millions of them, fly some 2000 miles in an incredible intercontinental migration. By the end of October, the monarch butterfly population east of the Rocky Mountains migrates to the sanctuaries of the Mariposa Monarca Biosphere Reserve in Mexico. They have been doing this successfully year on year - the butterflies even reach the same tree and branch as their ancestors. Fancy that!
We keep talking about being evolved! Our tax-saving frenzy is at best decades old. We have a long way to go - we need to catch up with the butterflies first.
The writer is a certified financial plannerwho runs Ladder 7 Financial Advisories and can be reached at ladder7@gmail.com.
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