Lesson 2: Investing is not ‘Tax Planning’

 It is a cruel joke that we spend hours together working for an MNC to earn the best salary in the industry (and we are very proud of it too), but spend very less time and effort when it comes to investing the money wisely. The painful fact is that with prudent investing someone earning half as much as we do can go ahead and get a lot more than us.

For many of us Investing has become synonymous with ‘Tax Planning’. when we land in a job, our parents take up the financial planning for us or so they say. The first thing that they advice is to take up a LIC policy and introduce us to some LIC agent who is their friend. That agent is wise enough to lure us into some policy that is good for him (in terms of the comission that he gets) than for us. And he says you will save so much on Tax. Wow!!! How happy we were to escape from tax. We are not to be complained for such a stupid decision to get some endowment policy where we pay around 65K per year for insuring our life for a mere 10 Lakhs. Wait!! Didn’t the LIC agent say that it will also act as investment since if you are alive at the end of the term you would get 13 Lakhs (Wow!!, but believe me this is all due to compounding and not due good annual return).

Tax has been a deadly word for many of us. I still remember that I could not digest the fact that I was going to pay 1500 Rs per month as tax in my first month of pay. I was totally shocked. To me  it seemed that 1500 was good enough to be someone else salary for a month. Hmm.. But then we learnt the hard truth – There is no escape from the Taxman. This is the main reason that we jump on to anything that says ‘Tax Saving’ not knowing what it is and do we stand to benefit from it.

Now let me show with an example why Insurance / Tax Planning / Investment are three different things entirely. Everyone must be insured. Good and all insurance policies including LIC have tax benefits. But never fall for the tax benefit alone. For example let us assume you indeed take the endowment policy we mentioned earlier for 15 years. That means for all the 15 years you will pay 65k and if you alive at the end of 15 yrs you get 13Lakhs, else your family gets 10 Lakhs. You get tax benefit for the entire 65K every year. Great you thought… But let us consider an alternative. Let us assume that you chose a term policy (Where the money you pay is not returned to you if you are alive Hmm..) for 15 Lakhs. For this you pay per annum only 3600 Rupees (way less than the 65k you had to pay for endowment policy). The remaining money you put in PPF for the same 15 yrs. At the end of 15 yrs if you are alive you don’t get any money from LIC (since it is a pure term policy), but from PPF you get 18 Lakhs. Also both you contribution to LIC and to PPF are exempt from tax (65k) Now you see the difference. No difference in the investment tools, both are very safe, both give tax benefits, but just a 5 minutes thinking would have saved 5 Lakhs !!! for you.

I know there are hundreds and hundreds  of people opting for endowment LIC policy and paying more than 50k without even a second thought just because they are too busy earning their money and they thought that it was the only option to save on tax!! How stupid we have been. Please don’t ever think that LIC is the only key to tax saving. NO. There are many wonderful ways to save on tax. We will take a look at them in the next lesson. Until then, Bye from Simon

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