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Plan your taxes early for stress-free year ahead
April, 21st 2009

Planning taxes early in the financial year might be an irksome task if you just finished formalities for 2008, but it can ensure a hassle-free year ahead.

Most salaried individuals in India think of tax-saving investments only in the last quarter of the fiscal year, when asked to submit investment proofs.

Planning taxes early can help avoid hasty decisions made later just to save tax without even actually evaluating the investment instrument.

"Any tax planning should ideally be done in the beginning of the (financial) year so one knows exactly how much he needs to save in the year," says Sanjoy Banerjee, executive director at ICRA Online. "April-May is a good time to begin."

Tax planning is a part of financial planning and should not be done solely to save tax, making it essential to keep your goals in mind.

MUTUAL FUNDS/ULIPs

Those who invest in equity linked savings schemes (ELSS) to save taxes can spread their investments over 12 months by opting for a systematic investment plan (SIP).

This approach helps you save a little every month to achieve the annual saving target and eliminates market timing as cost of purchase is averaged over time. For instance, if you decide to save 60,000 rupees via tax funds this year, a monthly SIP of 5,000 rupees can be initiated in April.

Starting investments later, say from November, would require a monthly investment of 12,000 rupees to achieve the target before March-end.

Starting late would also mean lesser dispensable salary in those months which can hurt your monthly budget. "It is better to invest systematically in ELSS schemes, if you wait for year-end pressure, you may be forced to invest at an unfavourable valuation point," says Banerjee.

Unit-linked insurance plan (ULIP) is another tax-saving investment and insurance option that is market linked. It's best to pay a monthly premium for such policies to take advantage of cost averaging over time.

RISK-FREE OPTIONS

Risk-free options to save tax include life insurance, national savings certificates and five-year bank fixed deposits. If you are opting for a high premium insurance plan, splitting the payment in two or four parts might be helpful.

New insurance plan seekers can opt for a semi-annual, quarterly or even monthly premium for ease of payments. Those who have old policies can opt to change their mode of payment to desired frequency.

As these tax-saving options are not market linked, one does not benefit from cost averaging, but splitting payments would hurt the pocket less. This would help manage finances better and also assist in avoiding the March rush for saving tax.

To start with, one can evaluate the salary components and begin investing accordingly after adjusting for deductions like provident fund, house rent allowance (HRA) and conveyance. A financial consultant or a chartered accountant can assist in arriving at a figure you need to invest over the year to minimize tax liability.

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