Death and Taxes are certain. Death happens only once. But, tax planning has to be done every year.
“Death, taxes and childbirth! There’s never any convenient time for any of them.” – Margaret Mitchell ( Gone with the Wind )
Tax planning is a big head-ache to many people. Some are so obsessed with saving tax that they do not mind investing in anything and everything which can reduce their tax liability.
How is Tax Planning generally done?
Following are my observations on how a typical investor does his/her Tax planning:
- Section 80c – I have noticed that many agents/advisors use this as a “strong selling point.” Investors also look into this section on their Form 16s or past Income Tax Returns and get worried about the quantum of tax liability. To claim Section 80c Tax benefits most of them end up buying wrong financial products.
- Last minute shopping – I personally experienced this in 2004/05. In December-2004, I received an email from my HR asking for Investment proofs. I had bought couple of Life-Insurance policies (Endowment & Money-back) immediately, just to save some taxes. Later in 2007 , I surrendered my Life-insurance policies. Many of us start investing in products (lump sum amounts) sometime in December or January when we get an email from HR or Finance department. This is very unhealthy way of investing in Financial Products.
- Life-Insurance for Tax saving purpose – Many of us buy life-insurance policies just to save some taxes. Every income earning person may require Life-Insurance. But spare a thought before buying Life-Insurance. Endowment or money-back or ULIPs may save you some taxes but they do not generate Growth in most of the cases. So, first ask yourself – “Do I need life insurance?” , “How much coverage should I take?”, “Can I afford to pay the premiums?” before buying insurance.
- Home loans for Tax saving purpose – I have been engaged in property consultancy for the last 3 years. I have seen many investors buying properties through home loans, again just to save some taxes. This may turn out to be very costly. Loan eligibility and loan requirement are two different things. Banks may sanction high loan amounts based on your income. And you may be happy to go for home loan to save some taxes. But think twice before doing so. Do not over leverage yourself. Else this may put a real strain on your finances.
- Some investors invest in products like ELSS (Equity Linked Savings Scheme) and PPF (Public Provident Fund) without even knowing that they have lock-in periods. They may end up facing liquidity risk when they try to redeem them.
What is the right way to plan my taxes?
- Calculate your net monthly/yearly savings. Identify your financial goals and calculate the required goal amounts. Allocate the savings towards each goal as per your risk profile and time-frame. Try to allocate the monies among the Financial Products which can not only meet your goal requirements but also are TAX EFFICIENT.
- Plan your taxes, right at the start of the Financial year. Do not postpone till December or January. Also, do not try to time the financial markets.
- Tax planning is something that can neither be done in isolation nor once a year. It has to be linked to your Financial Goals.
- Be aware of the basics of tax laws. Invest your time in understanding the basics.
- If you realize that the life-insurance policies that you bought for tax-saving are junk then do not hesitate to surrender or to make them paid-up. (You may visit my post on “How to get rid off bad insurance?”).
Tax-saving products are not bad. Let us not blame them. Instead let us analyze the financial products before buying them. Identify right investment avenues which suit your requirements and help in achieving your financial goals.
It is OK to pay some taxes when you can not save or cannot invest in right financial products. But, do not invest just to save TAXES. The cost of buying wrong financial products may outweigh the cost of taxes. Tax Planning is not a goal but a tool. Remember “Tax Planning alone is not Financial Planning.”
Kindly share your comments. Cheers ! ( Image courtesy of iosphere at FreeDigitalPhotos.net)