The deadline is fast approaching. If you, as a taxpayer, have still not done your tax planning, you really don't have much time left. Of course, you are not alone.
A recent article in the Economic Times cited data from Computer Age Management Services (CAMS) which pointed out that just 15% of the total inflows into ELSS funds comes through SIPs.
The article also pointed out data from the Association of Mutual Funds in India (AMFI) indicating that nearly 50% of the total inflows into the ELSS category happen in the last three months of the financial year, with March dominating.
These are some of the mistakes investors make when they leave tax planning to the last minute. Instead of opting for the more convenient and desirable systematic investing plan, or SIP, they invest at one go which is a risky way to invest in the equity market. Equity linked savings schemes, or ELSS, are actively managed diversified equity funds that provided a tax break under Section 80C. But the tax break is secondary. Primarily, they are equity investments and it is always wise to opt for the SIP route.
Another area investors are prone to commit errors is opting for life insurance schemes arbitrarily since the premium paid gets a tax break under Section 80C. As a result they are saddled with more policies than required and most of these policies give the agent a good commission and are not at all suited to the investor concerned.
Here’s how to get smart about your tax planning.
Step I – Look at outflows.
Before you look at any investments, check the outflows that qualify for a deduction under Section 80C.
If you are a salaried employee, calculate the amount that is already exhausted under the Employees’ Provident Fund, or EPF. This is a forced contribution from your salary to your provident fund. Subtract the amount the employer has deducted from Rs 1.50 lakh.
Now look at the education expenses of your child. These expenses can avail of a tax break under Section 80C. The fees are for a maximum of two children and for full-time courses at a recognised institution within India.
Thirdly, look at your home loan. The principal paid towards a home loan, up to Rs 1.50 lakh, can be claimed as a deduction.
If you are paying any premium towards life insurance policies, then this too will qualify for a deduction under Section 80C.
Chances are a number of you would have exhausted your limit under Section 80C if all the above are taken into account. But even if they are, it would be wise to still open a PPF account.
Step II – Now look at investments.
If you already have a Public Provident Fund, or PPF, then give this priority and invest in the account. This is an excellent long-term savings tool. You can invest up to Rs 1,50,000 in a year. But if that amount is way too much, fret not. The minimum is just Rs 500. So once you open a PPF account, it is very easy to maintain it despite the time frame being 15 years.
If you are starting out as an investor and have no investments at all, consider an ELSS. That way you start your equity exposure, which is a smart move when you are young, as well as do your tax planning.
However, since maintaining a PPF account does not put a stress on your savings, you can manage both. Our suggestion is that every investor must have a PPF account (we shall be tackling this in detail over the tax planning week).
Step III – Check life insurance.
If you have dependents, you must have a life insurance policy to provide for them should any calamity occur. If you already have a policy in place, then skip this step. Don’t simply take out polices for the sake of it.
Just remember…
Always think of tax planning as a financial exercise. Never view it in isolation from the rest of your portfolio and always from an investment point of view. Ask yourself: Does it fit well with your overall financial goals? For instance, PPF is an excellent retirement savings tool. An investment in NSC is great if you are saving for a specific goal and need the money within 5-6 years. (We shall be comparing NSC and PPF during the tax planning week). If your portfolio is packed with fixed income instruments and you have no equity exposure, then consider a tax-saving fund, or ELSS.
Good tax management can go a long way toward enhancing your portfolio’s return and saving tax. But the decisions need to be made in conjunction with your overall portfolio and not in an ad hoc fashion.
Over the week we shall look at specific investments to help you decide.