Tax planning, these words ring a bell in the minds of an average tax payer only in the months of January-March of every year, where individuals frantically invest in tax saving instruments to save on their hard-earned money to go to taxes. However this is not a good ploy, its more important to start tax planning at the beginning of the new financial year to put finances. For most individuals, financial planning and tax planning are two mutually exclusive exercises. When it comes to tax planning, more often than not, we simply go the traditional way and do the same investments that we did in the earlier years. This should not be the case. One must view tax planning in the same manner as one views long term financial planning. One must also make full use of tax breaks on offer so as to minimize taxes and maximize income.
In India, an individual gets an exemption of Rs.1 lakh from one’s taxable income under Section 80C, if the amount is invested in tax saving instruments. There are no internal caps for any particular tax saving instrument. As far as possible, it is advisable to invest the entire eligible amount. A wide variety of tax saving avenues are available from the equity based ELSS and ULIPs to life insurance, home loans, bank fixed deposits, National Savings Certificates, EPF (Employee Provident Fund), PPF (Public Provident Fund), etc. Investing Rs.1 lakh in a manner that saves both taxes as well as helps one achieve long-term financial objectives is not a difficult exercise. All it requires is some thought in drawing up the best-suited plan and executing the same in a disciplined manner. One must also have a proper mix of instruments depending upon one’s risk profile.
Depending upon the age-profile, at the start of one’s career when the near-term needs are limited, one should consider taking on maximum risk. Thus, allocate a higher portion to equity like ELSS but take care to select the right funds and remember, there is a lock-in of 3 years. A Systematic Investment Plan (SIP) would be beneficial to take advantage of rupee-cost averaging. The allocation can change in favour of low-risk instruments as age advances. Among low risk avenues, first is EPF, which is compulsory for salaried individuals. Next, one should look at PPF, which currently gives 8% tax-free returns but the scheme has a 15-year duration. Regular investment in PPF is advisable to enjoy the benefits of compounding. Here investors must know that the FM has indicated that withdrawals from PPF would be made taxable but details are awaited. As and when, PPF withdrawals become taxable it may no longer be the most preferred option. Bank FDs of 5 years or above which are eligible for tax-benefit under Section 80C may become a better alternative then, as the lock-in period is much shorter. Currently, interest on bank FDs is added to one’s income and is taxable.
Life insurance is also a must in one’s tax-planning. However, policies such as moneyback, endowment etc may not make good investment sense as premiums are high, returns are low, lock-in period is long and surrender value on premature closure is not attractive. One must therefore look at insurance purely for covering risk to life in the form of term policies, which are much cheaper. Owning property is another important tax-planning tool. One can save tax by taking a home loan as interest (upto Rs.1.5 lakh per year under Section 24) and principal repayment (upto Rs.1 lakh per year under Section 80C) carry tax benefits.
Besides investment types, other essential tenets of tax planning are:-
Start investing from April, do not make lump sum savings at the end of the financial year in March.
Make saving a habit (direct monthly debit from one’s salary account could be one way)
Select the right options in terms of security, risk-return trade off and liquidity.
Thus tax planning today is no longer just putting money in some designated options but has become a source of prudent wealth planning.
In India, an individual gets an exemption of Rs.1 lakh from one’s taxable income under Section 80C, if the amount is invested in tax saving instruments. There are no internal caps for any particular tax saving instrument. As far as possible, it is advisable to invest the entire eligible amount. A wide variety of tax saving avenues are available from the equity based ELSS and ULIPs to life insurance, home loans, bank fixed deposits, National Savings Certificates, EPF (Employee Provident Fund), PPF (Public Provident Fund), etc. Investing Rs.1 lakh in a manner that saves both taxes as well as helps one achieve long-term financial objectives is not a difficult exercise. All it requires is some thought in drawing up the best-suited plan and executing the same in a disciplined manner. One must also have a proper mix of instruments depending upon one’s risk profile.
Depending upon the age-profile, at the start of one’s career when the near-term needs are limited, one should consider taking on maximum risk. Thus, allocate a higher portion to equity like ELSS but take care to select the right funds and remember, there is a lock-in of 3 years. A Systematic Investment Plan (SIP) would be beneficial to take advantage of rupee-cost averaging. The allocation can change in favour of low-risk instruments as age advances. Among low risk avenues, first is EPF, which is compulsory for salaried individuals. Next, one should look at PPF, which currently gives 8% tax-free returns but the scheme has a 15-year duration. Regular investment in PPF is advisable to enjoy the benefits of compounding. Here investors must know that the FM has indicated that withdrawals from PPF would be made taxable but details are awaited. As and when, PPF withdrawals become taxable it may no longer be the most preferred option. Bank FDs of 5 years or above which are eligible for tax-benefit under Section 80C may become a better alternative then, as the lock-in period is much shorter. Currently, interest on bank FDs is added to one’s income and is taxable.
Life insurance is also a must in one’s tax-planning. However, policies such as moneyback, endowment etc may not make good investment sense as premiums are high, returns are low, lock-in period is long and surrender value on premature closure is not attractive. One must therefore look at insurance purely for covering risk to life in the form of term policies, which are much cheaper. Owning property is another important tax-planning tool. One can save tax by taking a home loan as interest (upto Rs.1.5 lakh per year under Section 24) and principal repayment (upto Rs.1 lakh per year under Section 80C) carry tax benefits.
Besides investment types, other essential tenets of tax planning are:-
Start investing from April, do not make lump sum savings at the end of the financial year in March.
Make saving a habit (direct monthly debit from one’s salary account could be one way)
Select the right options in terms of security, risk-return trade off and liquidity.
Thus tax planning today is no longer just putting money in some designated options but has become a source of prudent wealth planning.
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