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Business News/ Money / Calculators/  Start tax planning on 1 April of a new financial year
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Start tax planning on 1 April of a new financial year

If you haven't made any tax-saving investments, you may end up with products that you don't need

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As the end of this financial year is getting closer, your human resource department will start asking you for tax proof. If you haven’t made any tax-saving investments, you would, in the last minute scramble, may end up with products that you don’t really need. Monika Halan, editor, Mint Money, and Vivek Law, editor, Bloomberg TV India, tell you how to avoid mistakes in the weekly show Smart Money. Edited excerpts:

Vivek Law: Monika, for most employees, the provident fund (PF) contribution gets deducted through the year and qualifies for section 80C break. Many don’t know that they don’t have to save the entire 1 lakh. Could you tell us what to watch out for before buying more financial products?

Monika Halan: Watch out for insurance agents who make you believe that insurance is the only product that gives you a tax benefit. Tax planning is not something you do last minute; it’s something you start from 1 April of the new financial year, and build on it.

If you are scrambling for investments right now, you really need to get your money box in order. Now, tax planning is only a small component of a larger plan—the financial plan. This means using insurance to de-risk your portfolio, investments and cash flow, and instalment management.

In tax planning, the biggest question is what to do with the 1 lakh deduction? If your taxable income was going to be 10 lakh, and if you make all of these investments, it would be 9 lakh, reducing the overall tax that you pay. Which products qualify for 80C deduction? Contributions to PF, to Public Provident Fund (PPF), National Saving Certificates, National Pension Scheme, notified 5-year fixed deposits, equity-linked saving schemes, Seniors Citizen’s Savings Scheme—they all qualify. The principal of your home loan qualifies as does the school fees of two school going children.

For many high income earning, middle class Indians, now the PF contribution soaks up the 80C 1 lakh investment limit. There is no reason to put this money away at the end of the year in a product that is suddenly bought. So do add up all the things that you may have been investing in already to see if that 1 lakh limit is reached.

Get documents for the other deductions that you can claim. Medical insurance premiums get you a deduction of 15,000. Ask your bank or housing finance company to give you the interest certificate. Do remember that if it is insurance, it is term insurance that you are are buying and the premium gets you the 80C deduction.

Law: Ashok now joins us from Bangalore. What is your concern?

Ashok: I want to retire early but also be financially independent.

Halan: I am no party pooper. Take a sabbatical; travel around. So it is good to want to be financially independent. You may not want to retire from work because a lot of us do enjoy what we do.

Make the difference between financial independence and retiring from work. At 36, you have a formidable money box, Ashok. It’s full of good things—it is debt free, you have two flats, a plot and a car that you bought cash down. I also see high income flow, conservative expenses, large monthly surplus, and excellent use of resources to build assets. Your wife earns but you are keeping that apart from your money box as your daughter may have a sibling in a few years so you want to plan for that. That’s smart and prudent.

First, I want to look at your emergency funds. There is enough for your current monthly expense. When your wife starts working, do think of bumping it up by a lakh, just to compensate for her income.

You have a generous medical cover and your wife has one as well. But you should have one of your own. Whether you retire early or change your job, you need to control your own medical cover. When we are younger, we are disease-free, lifestyle diseases have not yet set in and so it is easier to get that medical cover. The costs are lower. Medical costs don’t get frozen in the year that you buy them. Every claim-free year adds a no-claim bonus to your cover. We are going to be conservative and suggest that you should have more than 3 lakh cover each for you, your wife and child, plus a 5 lakh top-up, keeping in mind that you live in Bangalore and that medical costs only go up. Do look at these covers in your mid- to late-40s.

You have bought a term cover; you need about a crore-and -a-half of cover. You are interested in mutual funds but an insurance agent talked about a product which has unit-linked mortality and that company’s funds have done well.

I agree with this. Yes, the mortality costs are low and that company’s funds have done well. But what happens if you buy that product today and five years later find that funds have underperformed? In mutual funds, you can switch at no costs, because it is a long-term capital gain. So, if you find that after five years, the fund isn’t doing so well, you can switch. The problem with investment-linked life insurance plans is that you can’t switch. You are caught. If you surrender, you will have to pay the entry cost of another insurance plan. This is why, in terms of control, being able to switch, sell and buy something else, I prefer mutual funds.

You are set. Even if you decide to retire early, you have built enough assets. Your portfolio is heavily skewed towards real estate. You need to build financial assets. In real estate, too, there is a down cycle.

You have strong PF deductions. I want you to open PPF accounts of 1 lakh each for yourself and your wife. Then use mutual funds to build the rest of your financial assets.

For goals within 10 years, you are using low equity exposure balanced funds with 15-30% equity exposure. You can also use short-term debt funds. For goals 7-10 years later, you need to build a strong equity portfolio. Do the due diligence that you did before you bought real estate. Mutual funds are no different—if you choose well and stay with it, you will get similar results.

Markets tend to perform over the long term. You should have at least half of your equity allocation in short- and mid-cap mutual funds. With every increment, funnel more into systematic investment plans.

Write to mintmoney@livemint.com OR sms at 9773270010. Type SM, give a space, and write your query.

Catch the show on Friday: 08:30pm, Saturday: 06:00pm, 08:30pm, Sunday: 10:00am, 12:30pm and 05:30pm on Bloomberg TV India.

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Published: 13 Jan 2014, 07:27 PM IST
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