Plan your taxes in April to choose right and earn more
April, 08th 2010
If you have just finished your tax-related investments in March, this article is for you. Often taxpayers postpone their taxes until March. Many end up blindly purchasing any tax-saving product, such as a unit-linked insurance plan, without understanding their needs.
Some investors end up borrowing to invest due to inadequate funds in their savings account. The best thing for an investor to follow is to invest in tax-saving instruments from April, says Suresh Sadagopan, a certified financial planner, Ladder 7 Financial Advisories. He points out that salaries tend to shrink in January and February, as employers deduct taxes towards the year end.
Identify a suitable instrument
Getting started with your tax planning early in the year will give you more time to examine various tax-saving options and identify the one that fits the bill in terms of your risk appetite and long-term as well as short-term goals.
Proper planning will also help you steer clear of the trap that many fall into while making tax-related investments at the last minute of blindly following a friends investment strategy or a neighbours recommendation. For instance, if you already have an adequate life insurance cover in place, there is no point going for a unit-linked insurance plan (ULIP) just because your acquaintance, who may be buying a policy for the first time, is doing so.
The long lock-in and premium-paying period could pose problems if you need the money after say two years to buy a house or any other purpose. Make sure you buy insurance with protection, and not tax exemption, in mind.
In the scramble to invest at the end of the financial year, many taxpayers make investments to exhaust their entire Rs 1-lakh exemption limit available Under Section 80C. In most cases, this could qualify as investing beyond the requirement.
For instance, tuition fee paid towards childrens education also qualifies as a deduction and thus, can scale down the amount to be invested for tax-saving purposes. Same is applicable to employees contribution to provident fund that is deducted from your salary every month. Kickstarting your tax-planning exercise now will help you keep track and maintain the required proofs.
Dont borrow to invest
Its possibly the worst mistake one could make while trying to save on the tax outgo. Some individuals try to take loans or use their credit card to make tax-related investments due to cash crunch in December or March, which is best avoided. The returns that the investment could yield may turn out to be far lower than the interest your loan carried. Tax-saving instruments typically come with a lock-in period, making it difficult to liquidate the same should you need the money to repay your loan at a short notice.
Invest in PPF on a monthly basis
Like utility bill payments or monthly groceries, a monthly contribution could help you build a slow and steady kitty if you dont have the money to invest the entire sum at one go. If you rush into investing large chunks of PPF in the last three months, you wont get the entire benefit of 8%. Ideally, an investor should invest before the 5th of every month in PPF to earn interest for that month. In case of cheque payments, ensure your cheque gets cleared by this date.
Look beyond 80 C
Most employers offer health benefits to employees in the form of group mediclaim cover, up to a maximum of Rs 5 lakh. Hence, you may not feel the need for a standalone mediclaim. PV Subramanyam, a chartered accountant and financial trainer, says: The need for this cover will be felt especially in case of a job loss, retirement or a job transition as the employers cover will lapse. You can opt for a family floater for dependants and benefit from lower premiums of up to 20%. Additionally, you save taxes up to Rs 15,000 if you cover your dependent parents.