tax
Don't let the tax tail wag the dog
The rule
A tax break is a good reason to prefer a good product. It is never a reason to buy a bad one. Do not let the small tail wag the big dog.
Where it flips
Ignoring tax fully is also wrong. Between two equally good products, the tax-friendly one wins, and the tax-free status of PPF and EPF is a real, big plus. Tax is the tie-breaker, not the trap.
Malkiel warns that the lure of 'saving tax' pushes people into poor products. The classic is insurance-linked plans bought every March just for the 80C break. Tax-friendly options like EPF, PPF and NPS are genuinely useful, because they are decent products that also carry a tax benefit. The test is simple. Judge the product first: its lock-in, its cost, and how it fits your goal. Treat the tax break as a tie-breaker, not the reason to buy.
A worked example
Buying a ₹1,00,000 endowment policy in March for the 80C break 'saves' ₹30,000 in tax. But it locks your money into a roughly 5% product for 15 years. The return you give up is far bigger than the tax you save. [illustrative]
How to spot it
- ·the product judged on its own merits first
- ·the tax benefit treated as a bonus, not the reason
- ·no last-minute March buy just to 'save tax'
Burton Malkiel · A Random Walk Down Wall Street