Last-minute tax planning for serial procrastinators
March, 26th 2010
Despite advice from financial planners to spread tax planning over the fiscal year, most self-employed and small businessmen tend to leave investments for the last week of March. The last-minute rush to get into tax-saving investments leads to mistakes.
This article is for such procrastinators who need not lose hope. The first thing to do is to evaluate your asset allocation. A simple rule of thumb is 100 minus your age should be the percentage of your portfolio that should go into equities. For instance , if you are 35, you should invest at least 65% of your portfolio in shares.
If you are overweight in debt, this could be the time to add equities through mutual funds using equity-linked saving schemes. If you have invested in your provident fund and are a moderate risk taker, the balance investment left could be invested in ELSS schemes, which offer you growth in the long term, says Anil Chopra, Group CEO, Bajaj Capital. However, if you have not invested even a rupee so far, it makes sense to stick to your asset allocation.
If you have bought into some financial products , explore option that may help you reduce the tax burden with them. Simplest being part pre-payment of a home loan if you are running short of section 80C eligible investments. But first check your loan repayment certificate.
Opt for simple products
There is not much time left. Things like SIP (systematic investment plan) or SWP (systematic withdrawal plan) where you can transfer money from debt into equity every month are ruled out at this stage. You have to take exposure to various assets at one point of time. Go for instruments that you understand well. For equity exposure , it makes sense to go for equity-linked saving schemes.
Opt for simple products
For exposure to fixed income space, traditional national savings certificates (NSCs) work well. Five-year bank tax-saving fixed deposits are also good for those looking for less locked in period.
If you have a long tenure in mind, you could better invest in Public Provident Fund (PPF). If you are underinsured, this could be an ideal time, to up your insurance and add to your term and health insurance.
Go with one-time investment
When buying in a hurry, do not purchase plans that have a commitment to pay over several years. It is better to spend some time understanding the product.
Look beyond tax
Experts emphasise on post-tax returns on investments instead of coupon returns. Put simply , you should ideally compare the available options in tax-saving instruments with other investment opportunities.
It makes sense to go for tax-saving investments as they offer effective diversification.
Tips & tricks
It is very much clear that time is not on your side and you should look for short-cuts . If you are not convinced with, say, a lumpsum investment in equities, better not go for it.