Integrate Tax Planning in your Financial Plan
"Taxes are not good things, but if you want services, somebody’s got to pay for them, so they are a necessary evil." - Michael Bloomberg
Come the last quarter of the year and people run from pillar to post trying to make some investments here and there in order to save money on taxes. But that is really trying to hold the nose from all the way backwards! On the other hand, if financial planning is the cornerstone of your life, you will not have to bother about tax planning at the end of the year alone as it is then incorporated as a part of your financial plan.
So to reiterate ourselves, a financial plan based on your age, income and life goals should be chalked out first and investments should be made accordingly distributing your portfolio among various asset classes. If you are doing this, you can be rest assured that tax planning becomes a continual process rather than a last minute helter skelter exercise!
That having said, here are some simple steps you can follow to go about a stress free tax planning exercise.
Assess your tax liability early
In order to integrate tax planning as a part of your financial plan, calculate your tax liability first. Those with a fixed income (salaried individuals) have lesser reason to worry, as they fall under specific tax brackets. However, self employed individuals and businessmen may have it a tad difficult in assessing their tax liabilities. If you do not have the expertise yourself, the best option is to hire the services of a chartered accountant.
Salaried individuals have a number of options
In order to ensure that there is a minimum deduction from your salary you can do the following things.
- If you are on good terms with the HR head of your company, see if you can tweak around a few components of your slary to enhance tax savings. For instance if you are entitled to lunch allowances, see if you can opt for food coupons instead. The tax emption on such coupons is Rs 50 per meal.
- While negotiating your salary components, include allowances such as transport, medical, education, communication allowance etc as a part of your salary. Also keep the actual receipts of the above mentioned expenses and produce them in time for your tax deduction calculations by your employer.
- If HRA is a part of your salary you can claim exemption under whatever is the minimum of three circumstances.
- The rent you are paying for your accommodation (actual) minus 10 per cent of salary.
- 50 per cent of your basic salary if you are living in a metro or 40 per cent in case of a non metro
- The actual HRA you receive from your employer
- You can use your home loan efficiently to claim a deduction of upto Rs 1 lakh on the principal component of your home loan and 2 lakhs under the interest part of the loan (This limit has been enhanced recently. Find details below)
The important thing is to get these things done well before the 31st March deadline, so that there is no last minute rush when your employer assesses your tax liability.
Find out your risk profile
Choosing an investment product or an asset class that does not suit your risk profile can indeed be a recipe for financial disaster. Make sure you find out your risk profile before you go about choosing a product that will help you optimize your savings. Once again, if you have a financial plan, you will know how much of a risk you can take according to your age, income and responsibilities in your life cycle.
Choosing the right instruments for tax planning
A tax planning instrument should fit into your overall investment strategy and the stage in your life cycle. For instance, if you have a large financial commitment to make in the next couple of years, it does not make sense to get locked into a long term instrument like a PPF, although it is one of the safest and most popular tax saving vehicles.
As per the latest budgetary announcements under the newly formed Government, section 80 C of the Income Tax Act, exemption limit has gone up from Rs 1 lakh to Rs 1.5 lakhs. Here is an eligible list of options under which an individual can get an exemption.
- Insurance premiums
- Employee Provident Fund (EPF) contributions
- Public Provident Fund (PPF) contribution
- Investments in National Savings Certificate (NSC)
- Investments in unit linked insurance plans or ULIPs
- Housing loan repayment (principal)
- Equity Linked Savings Scheme (ELSS) of mutual funds
- Tuition fees for the education of any two children of the taxpayer
- Fixed deposits with banks
- Post office savings scheme
- Senior citizen’s savings scheme (SCSS)
- New Pension Scheme
Another big relief that has come in for the salaried class is the fact that the home loan interest exmption limit has been increased from Rs 1.5 lakhs to Rs 2 lakhs. So this means, if you have taken a home loan for a self occupied house, you can save upto an additional RS 50,000 on taxes. This translates into a saving of Rs 15,000 each month for those who are in the highest tax bracket of 30 per cent.
These investments are not the only way in which you are eligible for tax deductions. Here are some other avenues under which you are eligible for tax deductions too.
|80 D||Medical insurance premium||Rs 15,000 or 20,000 (senior citizen)|
|80DD||Medical treatment and maintenance of dependent physically handicapped person.||Rs 50,000 (irrespective of the amount spent in a year)|
|80DDB||Expenses for medical treatment||Actuals incurred, with a ceiling of Rs 40,000 to Rs 60,000 (senior citizen)|
|80 E||Higher education loan repayment||Interest paid for a maximum of eight years or tenure of the loan, whichever is earlier.|
|80 G||Donations to charitable organisations||Maximum deduction of 50 %|
Thus, as you can see, tax planning need not be a hurried job if you plan well in advance after you have worked out your tax liabilities. If you are unable to figure out the right investment avenues for tax saving yourself, the prudent thing to do is to hire the services of a financial advisor for the same.