A few months, I had written a post on “Should you invest in NPS?” And it is a fairly popular post on the blog. However, if you go through the comments section of the post, it would appear as if the post was about “How do I invest in NPS?” or “How to maximize tax benefits from NPS?”
Not many asked questions about merits and demerits of NPS. It appears very few really cared about what I had written. All they wanted was to get the maximum possible tax benefit. Hence, readers (at least those who commented) are not so much concerned about whether NPS is a GOOD product for them. They are more concerned about tax benefits.
And this behavior is not limited to NPS investments alone.
We will buy even Traditional Life Insurance Plans for saving taxes
You would buy anything to save taxes. Such behavior has caused so much value destruction. I am sure most of us have bought traditional life insurance products at some point of time in our lives. I confess I am guilty too. Traditional life insurance plans are products that LIC used to sell (and still sells) to our parents. Endowment plans, money-back plans etc fall under the same category. Our parents’ generation didn’t have too many options when they purchased such plans.
You don’t have the same excuse.
By the way, private insurers also sell these products. So, I am not pointing fingers at any specific insurer.
Most people who bought such insurance plans only bought the plans only for the purpose of saving taxes. They didn’t understand the product before understanding. Well, if you knew that traditional life insurance products are good-for-nothing toxic (almost) financial products, you wouldn’t have purchased them, right? I didn’t realize what I was getting into when I purchased a traditional life insurance plan.
These plans are good only for the insurance agents and nobody else. In my opinion, IRDA, the insurance regulator, must get fair share of the blame.
Why does this happen? Why are we so fixated with tax benefits? Why do we have to maximize tax benefits? Why can’t we let go of some of the tax benefits? Why do we have to invest just to save taxes?
Why do we have to invest Rs 1.5 lacs in Section 80C products every year and Rs 50,000 in NPS for tax benefit under Section 80CCD(1B)?
I am not saying you should not invest. Of course, you should invest as much as possible. However, the choice of an investment product should not be driven by tax considerations alone. Understand the product properly before investing. Understand the benefits, risk involved, liquidity aspects, exit possibilities etc before making the decision. Also, check if the product is suited to meet your financial goals. Nothing like it if you get the tax benefits too.
Have financial goals
And Tax planning cannot be a financial goal. Financial goals have to be life milestones such as purchase of a house, children education and marriage etc or desired material possession or experience such purchase of car or going for a long vacation.
Saving money cannot be a financial goal per se. You save money for children education or a vacation. Children education or vacation can be a financial goal.
Once you have set your goals, it is easy to decide if a financial product fits your requirements or not. For instance, if you are saving for down-payment for a house in 2 years, you cannot invest in a product with a lock-in of 5 years.
If you become too dependent on others for your financial decisions, you will never be able to make optimal decisions. I am not saying that you become an expert. However, at least try to gain enough knowledge to ask the right kind of questions.
You won’t miss any train if you do not utilize the maximum tax benefits. Tax benefits are given for a reason, to encourage tax-payers to invest and make prudent financial decisions. Section 80C and NPS are not the only tax-saving avenues. The Government encourages purchase of health insurance through tax benefits under Section 80D, purchase of house through benefits under Section 80C and Section 24, higher education through benefits under Section 80E. The tax benefits are to encourage and guide you. Do make the tax benefit end unto itself.
Do you ever opt for higher education just because you will get tax benefit on interest payment on an education loan? You don’t, right?
Similarly, don’t invest in financial products just because you get tax benefits on the purchase.
Invest in only those financial products that are suited to meet your financial goals.