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One money resolution that we all make after the mad scramble as the end of March approaches each year is to do better with tax-related matters in the following year. And like all resolutions, this one too fades away soon. Planning to minimize tax obligations is an annual exercise. So it makes sense to have a set of rules that will make it less of an arbitrary exercise and the execution easier.

Planning and investing for tax benefits should not be seen as a stand-alone exercise but as part of the overall financial plan that considers the income and savings abilities, goals and risk profile of the individual. It should be in sync with your needs and goals. A young individual seeking to grow her corpus to meet long-term goals may prefer to invest in an equity-linked saving scheme (ELSS) or the National Pension System (NPS), which offer exposure to equity, while an older investor may find the steady returns with low volatility provided by debt instruments such as the National Savings Certificate (NSC) or Public Provident Fund (PPF) more suitable. Those seeking some income from their investments may prefer the 5-year bank deposits, with the option to receive periodic payouts to investments versus NSC or PPF where the interest is automatically cumulated. These preferences are described in the financial plan and executed via the asset allocation adopted in the investment portfolio. So, it is important that investments made for tax saving also be aligned to this asset allocation. Else, a portion of the annual investments may be working at odds to your goals.

The available income and ability to save should be considered when you make investments designed to save on taxes. Mandatory expenses get first claim as does an emergency fund and insurance. Investments come at the next stage. Using available income to invest to save taxes before meeting mandatory expenses may result in taking loans to meet expenses. The cost of debt may well cancel any tax saving. A better way would be to first determine the available savings and then assign to investments, including those for saving on taxes. Use tools such as budgets to cut back on discretionary expenses and improve savings to make full use of available tax-saving opportunities.

Select the products that are suitable to your asset allocation and provide the type of tax benefit you need. The benefit may be in the form of deduction from taxable income to the extent of investments made in specified products. These include the deductions for specified investments such as PPF, NSC, or ELSS, or payments and expenses towards home loan, education fees of children and premiums made on life and health insurance. Some investments come with the benefit of exemption from tax of the income earned. For example, specified bonds issued by institutions provide interest income that is exempt from tax. They can be used to earn regular income to meet needs without tax eating into it. Then there are specified bonds that help you avoid paying taxes on long-term capital gains earned on any capital asset, if the gains are invested in these bonds within a given period.

Prioritize tax-saving avenues based on your individual situation. Use eligible expenses first to reduce taxable income. Expenses such as insurance premiums, home loan obligations and school fees are typically incurred by most people, and these are eligible to be deducted in calculating taxable income. Next, use the mandatory contributions, such as to the Employees’ Provident Fund (EPF), which are also eligible as deductions while calculating taxable income. At the next stage make investments in tax-advantaged products. Select products based on the return, risk and liquidity features so that the investments are aligned to your needs.

Maximize benefits where available. For example, contributions by an employee to EPF is matched by the employer up to specified limits. You may use this to the upper limit to get the dual benefits of tax-saving and addition to the retirement corpus. Investments in products such as PPF and ELSS provide tax-exempt funds on maturity that can be useful in building a corpus. Explore less familiar avenues for tax benefits such as the additional investment limit available under NPS under section 80CCD to the extent of Rs50,000 and benefits for premiums paid on health insurance for parents who are senior citizens. Other ways to minimize tax liability includes using provisions such as setting off losses against income, and carrying forward losses to be set-off against income earned in the future. Invest in the selected products according to a plan. The best way is to stagger the investments over the financial year so that there is no pressure to find the funds required at the end of the year. Review the tax plan every year to reflect changes both in your situation as well as product features.

For your financial situation to truly benefit from the tax planning exercise, make sure that the money saved on taxes is used wisely to catch up with financial goals.

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