Why financial planning and tax planning are two different things
August, 03rd 2013
It really hurts to see a significant part of the salary get deducted towards tax. So the obvious question in everyone's mind is: How do I reduce my tax?
Every year we are forced to invest in something that reduces our tax liability. It may be NSC, PPF, ULIP, etc.
Tax planning: A new perspective These tax saving investments are at times taken based on advice from colleagues or friends. Generally investors tick the scheme if it helps to reduce tax liability.
Apart from reducing tax, there are some other questions to be asked.
What is the risk involved? Are the returns from the scheme taxable? Do I need to make investment in this scheme every year or just a one-time investment? Does it support my financial goals? Apart from tax saving investments is there anything to be considered in tax planning? Tax planning in your financial planning: Tax planning is also a part of your overall financial planning. When tax planning is done in your financial planning, it plans tax in a much broader perspective.
1. Tax saving investments: This is the most obvious one. In order to reduce the tax liability, where you need to invest will be answered here. This deals with the investments under section 80C. Also it covers section 80D and the housing loan interest for tax saving purpose.
When these tax saving investments are made or selected based on your financial plan, these schemes will not only save your tax, they will also help you achieve your life financial goals like children's future need or retirement plan.
Also, the tax saving investment scheme selected may change every year depending on the requirement of the financial plan.
If in a particular year, you have more exposure in equity, then the financial planner may recommend you to invest in PPF. In another year, if you have less exposure in equity, he may ask you to invest in mutual fund ELSS.
Tax planning will be different from year to year and person to person.
2. Salary structure: Nowadays, employers provide some flexibility in structuring the salary of their employees. Sixty-seventy per cent of the salary will be given under the predetermined heads. For the remaining part of the salary, employers will give you some flexibility. That is, you will be allowed to claim that portion of your salary under allowance A or allowance B or allowance C, or as a combination of allowances A, B and C. If your employers provide such flexibility then share the details with your financial planner. He will be able to tell you in what way you structure your salary that is going to be beneficial in reducing your overall tax burden.
3. Superannuation scheme: Your employer may introduce some superannuation scheme with some special tax benefits in which you contribute an X amount and your employer will also contribute an equivalent amount.
When your employer introduces any such schemes, if you share the details with your financial planner, he will study the scheme and let you know whether it is a good scheme or not.
If it is a good scheme, then is it suitable to you or not? If it is suitable for you then how much can you contribute towards the scheme?
Many employees are clueless what to do when the employer introduces such schemes. If you opt to do your tax plan in sync with your financial plan then all these problems will be solved.
4. ESOP: When employers allot some of their shares to their employees by way of employee stock option plan (ESOP), they generally announce some packages. That is, the employee will get X number of shares free and Y number of shares can be allotted at a subsidized rate.
Also, there will be some lock-in period for these shares. After the lock-in period the shares can be transferred to your demat account or the employers can sell those shares and give you the money.
Again, if you share these ESOP package details to your financial planner, he will be able to tell you in what way you claim your ESOP then that is going to be tax advantageous to you. Also, he will check in what way these ESOP will help you achieve your life financial goals.
Last words: From the financial planning point of view, tax planning has got much broader perspective. Generally tax planning will be done as a part of financial planning.
Tax planning is covered under financial planning. But tax filing is not covered in financial planning. However, financial planner may do that tax filing service also with an additional charge.
K. Ramalingam is the chief financial planner at Holistic Investment Planners, a leading financial planning and wealth management company. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.