This is time of the year when all the attention shifts to the taxes that are to be paid. In case your salary falls in the bracket where taxes are to be paid then people scramble around to find good places to park their money where they can also get a tax benefit. March is also the period when tax saving instruments sale is at its peak. Among different things available, there are National Savings Certificate, Public Provident Fund, Insurance policies, School fees, Principal paid in home loan, Stamp Duty & Registration, Equity Linked Savings Scheme, etc. which fight for that Rs. 1.5 lac slot under Section 80 C. The mad rush is mainly for Insurance policies where the agents sell policies to people in distress over saving tax. They can be sold policies worth 1 lac or so. Not many people know much about whether or not to buy insurance policies.
Insurance is a priority. It needs to be done. Normally, it should be anywhere between 10 to 20 times your annual expenses. So, if your annual expense is Rs. 1 lac, then you must buy insurance for minimum Rs. 10 lac. Now, if you approach an agent for the insurance they will offer you insurance which has money back written on it. The insurance will not be cheap; it could cost you around Rs. 10000/- or so depending on your age. This 10000 is divided into two parts, (i) term insurance - in case you die, your nominee gets the Rs. 10 lac. It will be around Rs. 1500-3000 approximately (ii) This second part is invested in different instruments and you are given the returns arrived out of it when the policy matures. The term insurance part is anyway the cost which you will never get back.
You should buy this money back insurance only if you are a habitual spender and are not able to save money. The habit of saving is very important and this money back policy is good for persons who do not have discipline. But two things need to be remembered. You get the promised amount only if you pay for the whole tenure. In case, you are not able to pay your policy will become dormant. In case you want to cancel the policy, you will not get the full money. Even though, the invested portion is big enough, they have their own loyalty multiplier coefficient which moves from 0.3 to 1. So even if you are eligible for getting Rs. 25000/- after three years, you will get only Rs. 10000/- or so. So buy this insurance only when you are sure that you would complete the whole period.
Else, you can go for the Term insurance part. In fact, it is best that you go only for Term insurance. This is cheaper and it will be purely for the purpose of your nominee who gets it in case something untoward happens to you. Mind you, you will not get anything from this policy if you live for the whole period. You can put the balance amount in National Savings Certificate or the Public Provident Fund account. If you have appetite for some risk then it is best that you invest in Equity Linked Saving Schemes. These schemes have the shortest lock-in period of 3 years, unlike NSC or PPF. It is best that you invest possible amount in ELSS in year 1, year 2 and year 3. After that you need not invest. On year 4, your 1st year scheme matures and you can reinvest that to save your taxes. Moreover, the receivable amount is not taxable as it is considered as long term investment.
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