With a little more than 6 months left for the financial year closure, most investors are yet to get serious about tax-planning. Conventionally, tax-planning has always been considered as an end-of-the-financial year exercise. So investors usually get very busy over the January-March period with paying their insurance premiums and investments in small savings schemes.
For a lot of investors, tax-planning is little more than a mandatory investment activity (under Section 80C) for saving tax. However, the fact is there is a lot more to tax-planning than writing cheques indiscriminately to your insurance company and towards small savings schemes. Tax-planning is as much about contributing to your financial goals as it is about reducing your tax liability. Therefore, while planning to save tax, change your perspective from tax-planning to financial planning. At Personalfn, we urge investors to begin tax-planning from day one of the financial year (i.e. April 1), however, it's not too late to begin now, in case you missed the bus earlier.
Investors must note that while tax-planning can assume many forms (i.e. Section 80C, Section 80D, Section 24(b)) we have considered the more flexible Section 80C because of the breadth of options available under it. For the uninitiated, Section 80C allows for a deduction of upto Rs 100,000 from the gross total income.
We have broken down the tax-planning exercise in 3 easy steps:
1. Compute your liabilities
The easiest and quickest way to go about tax-planning is to first get a fix on your liabilities that earn a tax benefit. The lone avenue over here that qualifies for a tax benefit is home loans (maximum limit of Rs 100,000 on repayment of principal). So if you have an outstanding home loan, you need to isolate the principal amount from the interest (in the EMI - equated monthly installment) to calculate the tax savings under Section 80C. Of course, if you do not have a home loan, then you can skip this step completely.
2. Compute your fixed investments/contributions
The second logical step is to calculate your annual contribution to EPF (employees' provident fund) and life insurance premium. Your EPF contribution is best discussed with your employer; he can tell you exactly how much you will contribute to your EPF. Add this amount to your annual life insurance premium, if any. We have not considered PPF (public provident fund) as a fixed investment simply because it's not fixed as investors can choose to increase/decrease their contribution upto a maximum of Rs 70,000 (there is a minimum annual contribution of Rs 500 to keep the account active). More importantly, we think investments in PPF (if any), must be made under Step 3 below.
3. Invest the balance in suitable avenues
Although it comes at the end, this is easily the most critical step in the tax-planning process. Once you have a fix on your liability (principal amount on home loan), EPF and life insurance contributions, you need to compute how much is still available under the Section 80C ceiling of Rs 100,000. The balance must be invested in avenues that suit your risk profile and help you fulfill your investment objectives. For instance, if you can take on risk and plan to set aside money for your child's education over the next 10 years, then investing in tax-saving funds (also known as ELSS - equity-linked saving schemes) could be the answer. If you can take on only moderate risk, then you could divide the money between tax-saving funds and PPF. The idea is that you should invest exactly where your risk appetite and investment objectives permit you to invest.
Although, it appears relatively simple at the end, unfortunately this is not the way most investors plan their tax-savings. For a lot of investors, it's still about investing in PPF and NSC (National Savings Certificate) because it is a) convenient and b) government-backed and therefore safe. In our view, investors need to give tax-planning a lot more thought and evaluate how they can use the Rs 100,000 tax-saving bounty a lot more fruitfully and judiciously.
By Personalfn.com
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