Spend, Save and Invest Smartly

Is Running Behind Tax at the Last Moment a Good Idea -The art of Tax Planning?





The months of January and February of a financial year is the time one remembers his taxes and with the due date fast approaching running behind taxes becomes a top priority and all other matters take a back seat. But is it a good idea keeping an important matter such as tax planning for the last minute? Would a General make a battle plan at the last minute without taking all eventualities into consideration? Haste makes waste is the proverb which comes to mind in such a situation. The loss one would incur with faulty tax planning is too high a cost to bear.

Tax Planning in India:
Think before you invest

Come tax season one rushes to buy an insurance policy in order to avail tax deductions on the premium under Section 80 C up to INR 1 Lakh. This is done just to save on tax irrespective of whether one needs such a policy or not. Any job done without proper planning results in a mess. The same holds true for finances. No financial planning leads to a financial mess. It is too late for a financial advisor to help out after years of indifferent tax planning.

Deductions and their Use in Tax Planning:
The all important Section 80 C

One has heard of the tax deduction of INR 1 Lakh under Section 80 C and rushes to invest in the tax saving instruments without realizing that he has already availed of most of the allowable exemption of INR 1 Lakh in the deductions.

One has availed of this deduction in the employee provident fund as well as the premium portion of one’s insurance policy and very little of the INR 1 Lakh is left behind. Most of the time one would invest in a life insurance policy too many and exceed the INR 1 Lakh limit by purchasing insurance policies which do not suit his needs merely on the word of the insurance agent.

Isn’t it very important to check which instruments come under the purview of Section 80 C deductions? One might invest in a tax saving bond such as an REC or an NHAI bond where interest earned is tax free. One does not get a deduction on the invested amount as this instrument does not come under the purview of the Section 80 C tax deduction.

One needs to check on the suitability of the instruments available for a tax deduction under Section 80 C for compatibility to his needs. If one has a short time horizon and is a risk taking investor he must opt for ELSS rather than a PPF which has a lock in period of 15 years and is a risk free instrument with no high return compared to an ELSS with a lock in period of 3 years at a high risk and high return.

One has to weigh carefully the opportunity costs as well as ones risk tolerance when making tax planning decisions. What is sauce for the gander is sauce for the goose is a saying which does not hold water when it comes to tax planning. The herd mentality certainly does not work in this case. One has to weigh ones risk appetite before making a decision. If one is risk averse he must choose tax saving instruments such as a public provident fund for his tax saving rather than equity linked saving scheme of a mutual fund which is suitable for more aggressive investors.

One can opt for a deduction on the principal component of the home loan if one has availed of a home loan and the tuition fees for one’s children’s education where tax deductions up to INR 1 Lakh can be availed. These are better options than merely adding on insurance policies paying premiums which might exceed the tax deduction limit and may then have to be surrendered at a loss.

Is buying insurance to save on tax a good idea - Tax Planning?

One remembers the phrase oil and water never mix. So is a good idea to buy insurance just for tax saving purposes? The word mis-selling of insurance comes to the fore when it comes to using life insurance as a tax saving instrument. One purchases a life insurance policy even if one does not need it. This works to the advantage of life insurance agents who make a killing in the tax season.

The selling of insurance policies to unsuspecting and care a damn customers by unscrupulous and greedy agents to gain huge commissions is a way of life in this season. The life insurance agents then advise one to churn the portfolio whereby one buys a new life insurance policy and surrenders the old one even though this might be detrimental to ones cause.

The greedy agents make a huge commission especially if one churns his ULIP policy for a traditional endowment plan which has a huge upfront commission. It is always wise to put oneself in the shoes of the opposite party such as the life insurance agent in order to understand the situation and make a wise decision.

  • The insurance agent sells one a life insurance policy one may not need. The decision whether one needs this or not is in his own hands
  • The insurance agent pockets a huge commission by selling one a life insurance policy he may not need
  • One in desperation looks to surrender the old life insurance policy in favor of a new one during the next tax season called churning of the life insurance portfolio.
  • The net result is that one may be sold a traditional endowment plan which has a huge upfront commission and the agent gets a double bonanza
  • The agent first sells one a policy he does not need. In the following tax season he advises one to surrender this policy at a loss and purchase a new policy which one might again not need pocketing high commissions. The net result is one suffers a huge loss and the insurance agent fattens himself.

There is a famous saying “ The hardest thing in the World to understand is the income tax”. This is definitely true if tax planning is not done in a proper manner and kept pending for the last minute. Running around at the last moment to save on tax without having a plan in mind results in a failure to properly utilize the tax saving deductions provided under the income tax Sections so generously by the Government of India. The least one could do is to utilize these deductions so kindly dropped into one’s hands. Remember to take the help of a tax adviser to do the most crucial job of the year one’s tax planning. But does the use of a tax adviser absolve one from knowing about his taxes. Definitely not. It is ones duty to read up on the income tax deductions and allowances and know how the procedure goes. Remember taxes cannot be wished away.

Financial Planning
Tax Planning
Investment Planning