Is tax-planning on your ‘to do’ list?

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.

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.

Financial planning for young and restless

The Indian youth never had it so good. On the consumption side, the choice of goods and services available is unprecedented. And as far as income is concerned, given the blooming economy and its ever-improving prospects, opportunities have never been better. So, the youth is earning a lot and spending a lot.

It’s definitely a happy situation to be in.

As a college student, you should be focussing on your financial future as well as your studies. No, not the financial future consisting of next week’s pizza fund, but your long-term personal financial future. Make sure you start your life after studies on the right financial foot by treating your financial future seriously while you’re still in college.

Young investors have an edge over others on account of their age. In other words, a young investor has more time on hand as compared with a middle-aged investor or one who is nearing retirement.

Young investors can take higher risk as compared with middle-aged investors or nearing retirement investor. This in turn affords young investors greater flexibility while making investment decisions.

If we take an example, considering most young people spend Rs 500 every month, then calculate how much money they are losing. It can be illustrated with the help of compounding method.

The percentage of younger generation in India is higher compared with the older generation. Over the past couple of years Indian economy has seen unprecedented boom, leaving surplus money in the hands of people.

The young can use financial planning route to meet their future goals. They have their whole life ahead of them and ample time to plan for every goal including retirement. The problem with the masses is that they do not plan their finances. Some who have decent salary packages and enough surplus available also invest without doing proper asset allocation in various asset classes such as equity, debt, real estate, gold etc.

There are various investment avenues available to young investors and the various facets of each avenue such as small saving schemes, equity, mutual funds, ELSS, unit linked insurance plan etc.

Today’s youth should ensure that he is associated with the right investment advisor at all times. He could well be the individual who plugs the gap between youth achieving or not achieving his financial goals and objectives.

Financial markets have become very complex and there are varieties of products available to choose from. The choice of product will depend upon:

The age of the client
The time horizon of investments
The risk appetite of investor
Need of the investor

As a thumb rule, a person shall invest 100 minus his/her age percentage of his/her portfolio equity and the remaining in debt, after providing for sufficient amount in the form of liquid assets/cash for emergency provision. A person shall also plan for the purchase of a house.

If a young person has a high-risk appetite and the time horizon of investments is also long, he should invest more money in equity and equity-related instruments and fewer amounts in debt. When a person starts working, his income level is also low and there is very less surplus available for investments after meeting his monthly expenses. Every young person would like to become rich faster.

Small savings per month, if done in a disciplined and systematic manner, will lead to a higher amount of wealth accumulation over a longer period of time.

If a young person (23) starts saving Rs 2,000 per month till his age is 60, he will be able to accumulate Rs 3,96,06,204, if rate of return on investments is 15% pa. In this case I have not taken into consideration the increase in salary and thus increase in amount of investments.

The young investors first have to do their asset allocation. After deciding about asset allocation, the choice of products will start.

The writer is a certified financial planner and full member of FPSB India and working as academic and regional head (western region), International College of Financial Planning, Mumbai.

FPSB India relies on its members’ prudence, competence, and ethical standards to have submitted this write-up in good faith in their personal respective capacities.