Don’t be burdened by tax planning, make the most out of it
Tax Planning Investment
You should take tax planning more seriously, here’s why…
How many insurance policies have you accumulated over these years due to your last minute rush for saving income tax? Despite that, it’s quite possible, you are still under-insured.
More you postpone your tax planning, thinking that you would do some Jugad towards the end of the financial year, higher are the chances that you would make tax planning blunders.
There are better ways to address your tax planning concerns.
First off, you need to change your mindset.
You shouldn’t treat tax planning as a separate exercise.
Ideally, it should be a part of your overall financial planning.
If you are a conservative investor and investing in an aggressive Equity Linked Savings Scheme (ELSS) offered by a leading mutual fund house, it might be your mistake. Similarly, if you have a high-risk appetite and longer time horizon but you are still investing Rs 1.5 lakh in Public Provident Fund (PPF), perhaps, you are missing the bigger picture.
Here’s the right approach to saving income tax…
- Estimate your income
- Check the tax slabs
- Consider all tax saving options available to you
- Shortlist the ones that are in line with your risk appetite and financial objectives
- Create a plan to make the most of them
Mr Anil Jain—a practising architect, earns a net income of Rs 8.4 Lakhs. He lives in his own house and pays Rs 15,663 towards his home loan EMI. He is the sole earner in the family of four. He has two school going kids—his daughter is in 5th standard, and his son is in 2nd. He prefers to take calculated risks and given a choice would be comfortable with the split of 60:40 in equity and debt. He has a family floater healthcare policy of Rs 2 lakh.
Here’s how he should approach his tax planning needs?
Mr Jain should try to get the bifurcation of his EMI. He can claim the interest part of his annual installments under the head of “Income from House Property” as the negative income. While the principal part can be claimed as a deduction u/s 80C.
He can also avail the deduction for the tuition fees he paid for both his children. However, it’s noteworthy that, the overall amount of deduction u/s 80C, 80CCC and 80CCD should be confined to Rs 1.5 Lakh. This year, his principal repayment accounts to Rs 57,388 and the tuition fees for both children were Rs 24,000. Please don’t forget, only tuition fees are allowed as a deduction, any fee claimed under any other head is disallowed, although you paid it from your pocket.
In other words, to complete the quota of Rs 1.5 Lakhs worth deductions, he still needs to save Rs around 5,800 per month. Considering his risk appetite and goals, he can opt for a Systematic Investment Plans (SIP) offered by a well-performing ELSS fund and put Rs 3,400, and he can invest Rs 2,300 every month in PPF. If he follows this plan from the beginning of the financial year, he won’t have to think about arranging Rs 68,000 towards the end of the fiscal year.
If you have noticed, Mr Jain has opted for a family floater insurance policy of Rs 2 Lakhs. He might think about buying an individual policy for him and his spouse or increasing the coverage upto Rs 3 Lakhs at least. He should also consider buying a super-top up health insurance cover for ensuring that the financial impact of hospitalization expenses on his budget is minimum. He can claim a deduction for the premium payment u/s 80D.
And avoid doing this…
Many people are reluctant about optimizing the overall return on their portfolio. Now take the example of Ms Akshita Verma. She’s a conservative investor who works for a private limited company. Her gross income is Rs 5.3 Lakhs. She lives in a rented house that costs her Rs 72,000 p.a. and her PF and NPS contribution is about Rs 18,000 p.a. Still, she invests Rs 1 Lakh every year in PPF. Better tax planning will let her earn higher returns. She should invest only Rs 60,000 (Rs 150,000- Rs 90000) in PPF.
True, she’s a risk-averse investor but being risk averse shouldn’t make you a reluctant investor. She can consider other fixed income paying options. For example, if she opts to invest Rs 40,000 (the excess money she’s currently putting in PPF) in the safest Peer-To-Peer (P2P) Lending project she will earn a post-tax return of at least 12%. And if she continues to invest Rs 40,000 every year in P2P Lending projects, she would generate Rs 1.25 Lakhs more than what she would earn by staying with PPF.
Don’t be blinded by safety…
|Investments in P2P Lending Projects||Investments in PPF|
|Investment amount p.a.||40000||40000|
|Post tax interest rate||12.0%||7.9%|
(For illustration purpose only, although the comparison is based on prevailing rate of returns)
Point to note
There’s nothing wrong with PPF. In fact, it’s one of the most rewarding tax saving tools available in the fixed income category. But you shouldn’t go overboard with it.
Take a wise decision…
It would be far from reality if anybody tells you that P2P Lending projects are risky and you shouldn’t invest in such projects.
This is the reality
The risk is part and parcel of any lending activity, but it can be avoided, mitigated, transferred and absorbed through better credit evaluation processes and other risk management processes. For example, a platform like i2iFunding may list only 10% loan proposals it receives for funding. It can classify projects under various baskets based on the risk involved. And, to protect your interest as an investor, it can offer you a unique benefit of principal protection fund.
As said earlier (and numerous times), use your resources optimally.
Prudent and efficient tax planning will not only help your save taxes but will open up a whole lot of new avenues for wealth creation.
What are you waiting for then?