Tax planning is often a ritual that people do not give too much
importance and is at best considered a necessary evil. More often than
not, for individuals, financial planning itself begins and ends with tax
planning. The fact however is that tax planning is the first and a
very important step towards financial planning.
Suitability Analysis
Today, tax-saving avenues' offer a good range of investment
opportunities with different levels of risk, return and liquidity.
Choose an appropriate mix of investments keeping in mind your financial
objectives. Most of the time, we either take excessive risk or too less
risk. Do not get carried away by past data, for eg. when markets are
at a high and about to fall, equities will give you the best track
record. On the contrary, when interest rates are at a peak, it is the
best time to look at fixed income investment avenues and lock-in the
interest rates for the long haul.
Given the current condition of the markets, both equity and debt pose
a fine opportunity to balance investments. Interest rates are at a
peak and it may be appropriate to choose your bank deposits with 5 year
lock in which will also provide you with tax benefit. At the same
time, global cues have weakened the equities and most of the
investments within this arena are available at lucrative valuations. If
you already hold ELSS funds, it may be the right time to average your
holding.
Often, in the last minute frenzy of saving taxes, one dumps all their
monies in one single avenue. Do take a planned and well-informed call.
It is recommended to use a combination of investments and have an
appropriate asset allocation, based on your risk appetite. Also keep in
mind the tax you need to pay on the returns from the tax saving
investments that you choose.
Tax saving without investing!
This is true contrarian style; where you squeeze benefits without any
penny going out of your pocket and even better, when you squeeze
benefits out of expenses.
1. Exemptions/Reimbursements
First, one needs to look at the reimbursements that are available
from the company and take maximum advantage of the same. Normal expenses
that one incurs could help save tax. Some examples for the same would
be Telephone / Fuel Reimbursements, Meal Vouchers, Company Car, etc.
Provisions for these could differ from company to company. A person in
the lower tax slabs can sometimes reduce one's tax liability to nil with
exemptions alone!
| EXEMPTIONS |
House Rent Allowance |
Minimum of :1. Actual HRA |
| 2. Rent Paid - 10% of Basic |
| 3. 40% of Basic (Non-Metros) or 50% of Basic (Metros) |
| Conveyance Allowance |
Rs. 800 / Month |
| Leave Travel Allowance |
2 trips in a block of 4 Yrs |
| Amount not exceeding Air Economy or Rail AC I |
| Fare shall be for shortest distance and for a single destination |
| Medical Reimbursement |
Rs. 15,000 / Annum |
2. Deductions
There are several deductions available. Section 80C allows a maximum
limit of Rs. One Lakh across investments ranging from — Provident Fund
(including Public PF), Infrastructure Bonds, Fixed Deposits (>= 5
Yrs), NSC, Insurance / Pension Plan, Unit Linked Insurance (ULIP),
Equity Linked Savings Scheme (ELSS), etc. It also includes tuition fees
of children and also the repayment of principal on housing loan.
In addition, Infrastructure bonds worth Rs. 20k / annum is allowed
for tax benefit u/s 80CCF. Infact, given the interest rate levels, this
seems to be a lucrative investment avenue. Whilst investing in
infrastructure bonds, it is pertinent to look at the rating, a 'AA+' and
above is considered safe for investing. You would also have the option
of choosing annual payout of interest or cumulative, here again you
can choose the one that suits you best. These are typically launched
during the fag end of the financial year and the window to subscribe is
open for a brief period ranging from 15 days to a month.
Medical premiums up to a maximum of Rs 15,000 qualifies for
deduction. One can claim an additional Rs 20,000 for parents (senior
citizens).
3. Home Loan benefits
There is one more reason to buy a house — the tax benefits on your
home loan, but remember, this should definitely not be the sole reason.
The EMI that you pay towards such home loan has two components —
Interest and Principal repayment. We have seen that principal will
qualify under Section 80C among other investment avenues. The interest
component provides a separate deduction and has a limit of Rs. 1.5 lakh
for a self-occupied property.
As we welcome the New Year, let us vow to plan better and choose the
contrarian way to create wealth and optimize on taxes - and not get
caught in the last minute frenzy of tax planning!
Tips for the week
- Understand your long-term financial goals — this is the starting point.
- Start early so that you can do an effective financial plan, along
with tax savings. This also gives you time to carefully evaluate various
investment avenues.
- Some tax savings do not require you to invest — take full advantage of them.
- Hedge your Health / Life Risks.
- You can claim a separate deduction for medical premium of your parents.
- Take an informed decision, understand various nuances of investment
avenues such as the time frame for contributions and also the lock-in
period for investments.
- If you find it difficult to manage enough money for tax saving
investments every single time, use shorter-term products, so that
maturity value can be used to save tax subsequently.
The author Mr. Anil Rego is the CEO and founder of Right Horizons,
a leading end-to-end Investment Advisory and Wealth Management firm
that focuses on providing financial solutions that is specific to
customer needs.
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