Here’s a thought – when it comes to investing in the normal course, investors are willing to spend time, evaluate various options and meticulously plan the entire process. But when it comes to tax-planning, handling it in a rushed manner towards the end of the financial year is an acceptable proposition. While investing can be a sporadic activity, tax-planning is an annual exercise and hence can have far greater implications on one’s finances. Finally, when investments are made in designated avenues for the purpose of tax-planning, they deliver dual benefits i.e. reduce the tax liability and generate optimum returns.
Despite the obvious benefits that tax-planning offers, the apathy displayed by some investors towards it is rather surprising. Perhaps these investors continue to look at tax-planning as just another annual obligation that must be fulfilled. As a result, they haven’t fully understood the benefits that the tax-planning exercise can deliver.
Investors would do well to appreciate that tax-planning forms an integral part of their financial planning. Hence, an adequate amount of time and effort must be devoted towards the exercise.
Speaking of time, it’s important that investors commence the tax-planning activity well in advance; waiting for the last moment is certainly passé. This will give them the opportunity to thoroughly evaluate various options. And with the half-way mark of the financial year approaching, we believe it is high time investors got started.
Another popular reason for investors shying away from the tax-planning exercise is that it is perceived as being too complicated. Nothing could be farther from the truth. With good advice (read the services of a competent investment advisor) and time on hand, tax-planning is not half as difficult as it is made out to be.
For example, while tax-planning can assume many forms (i.e. Section 80D, Section 24(b)), Section 80C is the key section for the purpose of claiming tax sops because of the breadth of options it offers. Investments (like Public Provident Fund (PPF), National Savings Certificate (NSC), tax-saving fixed deposits and tax-saving mutual funds, among others) and contributions (like life insurance premium and repayment of principal on a home loan, among others) of upto Rs 100,000 per annum are eligible for deduction from gross total income. All investors need to do is follow some simple steps and the tax-planning exercise can be easily sorted out.
· Tax-planning: The ‘small savings’ way
To begin with, investors must find out how much (based on their incomes) they need to contribute towards the Section 80C kitty. Tax-advisors and chartered accountants can aid investors on this front.
Once the investment amount is known, the next step is to get a check on the ongoing investments and contributions that are eligible for tax benefits. For instance, if one has availed of a home loan, he needs to find out (from the housing finance company), what his annual contribution towards the principal repayment will be. This is important since the EMI (equated monthly installment) consists of both the principal and the interest components. The interest component is eligible for tax benefits under a different section.
Then the premium payments on existing life insurance policies must be taken into account. For salaried individuals, contributions to EPF (Employees’ Provident Fund) should be factored in; the employer will be best equipped to provide information about this. Finally, investment avenues like PPF wherein annual contributions are mandatory should also be considered. Once the investor gets a fix on the above, he will be unambiguously aware of the additional sum to be invested/contributed towards Section 80C.
Principles of financial planning like asset allocation and investing in line with one’s risk profile should kick in at this stage. For instance, risk-averse investors should ensure that a greater portion of their tax-planning portfolio is held in assured return schemes like PPF, NSC and tax-saving bonds. Conversely, risk-taking investors can have a portfolio skewed in favour of market-linked avenues like tax-saving mutual funds (also known as equity-linked saving schemes - ELSS) and unit linked insurance plans (ULIPs).
The tax-planning exercise can also throw up some ancillary benefits. For instance, it offers the opportunity to take a hard look at one’s portfolio. This might throw up some interesting observations - say the lack of or an inadequate insurance cover, or a portfolio skewed in favour of assured return schemes in a risk-taking investor’s portfolio.
As mentioned earlier, the tax-planning exercise is not half as difficult or dreary as it is made out to be. All one needs to do is be methodical, seek advice and the rest will fall into place. Finally, that it can significantly contribute to one’s finances, should be reason enough to get started at the earliest.
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