Ground Rules for Annual Tax Planning

Ground Rules for Annual Tax Planning

22 Jan 2019

As is the case every year, the January-March quarter invariably turns out to be the peak season for the crucial and all-important Tax Planning exercise.

Whether you are a salaried individual or a self-employed person or a professional, you are basically running against a tight deadline to do your annual tax planning as March-end is just round the corner. It is quite possible that you might end up making blunders if you rush to buy investment or insurance products, which are not suitable or aligned with your financial goals and risk appetite. As the age-old saying goes, "Haste makes waste", many people usually get stuck into products that require recurring investments in subsequent years and thus their whole financial planning can go for a toss.

Evaluate recurring investment products and get your arithmetic correct before committing to any investments. Don’t Invest more than what is required. You can avoid going overboard on tax-saving instruments if you take it step by step. You can use the same funds to invest in better alternatives that are completely in sync with your financial goals and do not entail multi-year commitments.

Adhering to a few simple ground rules as enumerated below can go a long way in helping you meet your financial goals, create wealth in the long-run and also plan your taxes wisely:-

Don't leave tax planning till the end of the financial year / Make tax planning a disciplined year-long exercise -A common mistake which most people make is that they wait for the last quarter of the financial year to plan their taxes. However, such an approach can come at a high price if you invest in a hurry without doing sufficient research. A more prudent approach would be to plan your taxes in a disciplined, systematic and consistent manner throughout the year instead of leaving it for the Jan-Mar quarter. This will help you select the right financial instruments for investment, which will not only help you create wealth for your financial goals but also help you save taxes.

Your tax planning should not be a knee-jerk event that happens only in March, but a part of your overall financial planning. Instead of packing your entire tax planning in March, spread it across the year and make informed decisions. You should buy an insurance plan only if you need life cover. Invest in an ELSS fund only if you need to take exposure to stocks. Lock money in the PPF, an NSC or a bank fixed deposit if you want to invest in debt or fixed income products. Take a health insurance plan if you need medical cover, not just because you get a deduction under Section 80D. The tax benefit is incidental, not the core.

Take full advantage of all tax exemptions - Make sure you avail of all the tax exemptions available under various sections of the Income Tax Act, 1961. This list of exemptions has to be optimized depending on your facts and circumstances. If you and your family members are not claiming the optimum benefit of exemptions and deductions, then it is time to focus on investment planning in the group so that every family member gets the full benefit of such tax exemptions / deductions.

Don’t invest more than required – As mentioned at the start of this blog, the common problem with individuals, especially those who are in the highest 30 percent tax bracket is that they tend to invest more in tax saving instruments than the prescribed limits or what is actually required for meeting their financial goals. This is because such individuals are largely observed to be unorganized when it comes to investment or tax planning and also have a housing loan running, besides investments in Public Provident Fund, ELSS as well as insurance policies. To cite just one example, a person can claim deductions under Section 80C of the Income Tax Act, 1961 with about 15 types of investments and expenses. So, to put it short, invest only upto the level of your actual requirements.

Don’t mix insurance with investment - Buying life insurance as an investment and not purely for insurance purposes is probably the most common mistake stemming from ignorance. A life plan should be taken merely to secure one's dependents in case of one's demise, not as a return bearing investment. So, a unit-linked insurance plan or a traditional insurance policy will not be able to give you adequate protection since a large chunk of the premium goes as an investment. Instead of these high-premium plans, which combine investment with insurance and require multi-year premium commitments, buyers should opt for pure term plans. These are pure protection policies that charge a very low premium for a very high insurance cover. On an average, for less than Rs. 12,000 a year, a 30-year-old non-smoker can buy an insurance cover of as high as Rs. 1 crore. If you buy such a policy online, the premium is even lower. Term plan premiums are low because there is no investment involved. These policies don't pay anything if the policyholder survives the term of the plan. On the other hand, an average ULIP which offers a cover of Rs. 1 crore will have a premium of approximately Rs. 8-10 lakh, while a traditional plan will cost roughly Rs 12 lakh.

Diversify your portfolio – There is a famous saying “Do not put all your eggs in one basket”. This is particularly true for your investments. Instead of investing in just one asset class such as fixed income or equity, spread your investments across different asset classes which are in sync with your financial goals and risk appetite and further also help you save taxes upto the maximum permissible legal limits.

ELSS is not for Everyone –If you are below 50 years of age, then opt for Equity Linked Savings Scheme (ELSS). Stagger your investments atleast in two parts before March end instead of putting in lump sum amounts. Preferably avoid ELSS if you are close to retirement.

Senior Citizens and Dependents – There will be certain deductions which can be claimed by you if your parents are senior citizens and you are paying for their health insurance. If a person has an ongoing educational loan, the interest can be used for deduction under section 80E. A deduction can be claimed under section 80DDB if your dependent is suffering from a specified disease such as neurological diseases, chronic renal failure, cancer, etc.

Exempted Incomes – There are innumerable incomes under the Income Tax Act which are exempted from the purview of tax. These incomes are known as "Exempted incomes". Interest income from tax-free bonds plus any income from agriculture are two such items of exempted incomes. There are several other exempted incomes also besides what has been discussed here and you should make a note of the same. Proper planning of your investments in a way so as to generate tax-exempt incomes is another golden rule of tax planning.

Now that the ground rules for annual tax planning have been discussed in such detail, we hope that you will definitely make this a part of your New Year Resolution. Happy Tax Planning!

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.