Tax Planning – Better Start Early

Its that time of the year again when one should start his/her tax planning if one has not started already, with 6 months left for the close of the financial year. This is the right time for the ones who have not started yet for their tax planning exercise. Rushing around in the month of March to get invested in any investment avenue available on hand is not a very good idea.

Options AvailableThe efforts which one puts for conventional investments, the same degree of effort and planning needs to be “invested” while tax planning. Likewise, it is vital that tax-saving investments be made in line with the investor’s risk profile; also the tax-saving portfolio should be a well-diversified one. At present the various avenues present to the investor range from ELSS schemes, ULIPs, LIC, national savings certificate, public provident funds and 5-year bank fixed deposits. A judicious mix of the above in the right proportion is what the investor must target.

Asset Allocation The tax-planning exercise can commence with a review of the existing tax-saving investments. Investors should enlist the services of an investment advisor and review the utility of such investment avenues. If any avenue has ceased to add value to the portfolio or is a mismatch, then the same should be done away with. Investment avenues, which are for very long duration like the PPF or ULIPs, should be carefully decided before investing. For example an investor with a low risk appetite shouldn’t go for a ULIP, which invests all assets in equity. In such a scenario, the investor stands the risk of being underinsured and also being invested in an avenue, which doesn’t match his risk profile.

Compute what the fixed commitments are. For example, for salaried individuals, a statutory deduction like contribution towards Employees Provident Fund (EPF), which is also eligible for Section 80C benefits would qualify as a fixed commitment. Similarly, premium payments for on-going insurance policies or contributions towards existing PPF accounts would fall under the same category.

The investor’s risk appetite will play a vital role in determining the allocation to each investment avenue. Broadly speaking, assured return avenues like NSC and FDs will dominate a moderate risk-taking investor’s tax-planning portfolio. Conversely for risk-taking investors, tax-saving funds and ULIPs should be staple diet. If ELSS feature in the plan, starting a systematic investment plan (SIP) which runs over the ensuing 6-Mth period could be a good idea. By investing over a longer time frame, investors can minimise the risk of mistiming the market.

This form of investment also ensures a discipline and over a long period the investors benefits from this. Suppose an investor invests Rs. 100000 lakh per year for 15 years then on maturity assuming a 10% return on his portfolio of tax saving investments he would get Rs. 3494973 back after 15 years. So there is a lot of merit in this tax planning exercise and one should give appropriate time and effort on this.