Spend, Save and Invest Smartly

Tax Planning is not Financial Planning-Think Beyond Taxes





The due date to file your income tax returns (ITR) is fast approaching. Insurance agents are on the prowl advising you to pick up life insurance products and save on tax. Your friends advise you to buy this or that financial product and save on your taxes. It would do you well to remember the famous proverb "Act in haste repent at leisure".Tax planning is not financial planning.Think beyond taxes.

Know your financial goals

A goal is a target you set yourself where you are and where you want to be. A financial goal is a monetary objective (money goal) you wish to achieve within a set time.

Set your time horizon

Your financial goals can be

  • Short term (3-5 years).
  • Medium term (5-10 years)
  • Long term (15 years and above).

Buy a life insurance plan that suit your financial goals

You can purchase a life insurance policy and get a tax deduction on the premiums paid up to INR 1.5 Lakhs under Section 80 C of the income tax act.

Protection / Insurance
Endowment life insurance plan
Unit linked insurance plan
Whole life insurance plan
Child Endowment life insurance plan
Money back life insurance plan
Child Ulips

Your first goal should be to pick up a life insurance plan as you need to provide for your family even if you are not around. There are different life insurance products such as term life insurance plan, endowment life insurance, whole life insurance or even a unit linked insurance plan. You get a tax deduction under Section 80 C up to INR 1.5 Lakhs on all these life insurance products. But which life insurance plan should you buy? Do not buy life insurance just to save tax. If you are newly married or have young children you need a huge sum of money to provide for your family in case of your (policy holders) early demise.

These are early days in your career and you may not have much money in savings. You must invest in a term life insurance plan (Charges you a low premium than other life insurance products with a high sum assured for a fixed time period). A term life insurance plan has no survival benefits. You survive the term of the plan you get nothing. If you are over 57 years of age and nearing retirement you definitely don’t need a term life insurance plan as you would have sufficient savings and the premium for a term life plan would be ridiculously high.

Invest only in tax saving instruments which meet your financial goals

You can invest in certain financial instruments and get a tax deduction up to INR 1.5 Lakhs under Section 80 C of the income tax act.

Investments / Savings
Public Provident Fund
Employee Provident Fund
5 Year Bank Fixed Deposits
National savings certificate
Subscription to NABARD Bonds
Senior citizens savings scheme
Equity linked saving schemes
Post office monthly income scheme

You must choose your tax saving investments based on the amount of risk you are willing to bear. If you are an aggressive investor you can invest in equity linked saving schemes (ELSS) which invest over 80% in equity.

Remember:High returns at high risk
You could get returns in excess of 9-12% if you invest in an ELSS. You could also lose money if the stock markets crash. If you are a conservative investor then you can invest in the PPF or a 5 year tax saver fixed deposit. Your principal (amount invested) remains safe and you earn an interest.

Remember : Lesser returns at a low risk
You can invest in certain tax saving instruments only once you attain a certain age. You can invest in the senior citizen saving scheme (SCSS) only if you are over 60 years of age.

Check the lock in time of your tax saving investments

If you are a conservative investor you would invest in tax saving instruments which are safe. (Principal is intact and you get interest on it).

You could invest in the PPF, 5 Year tax saver FD or Post office schemes. You must note that many of these safe financial instruments have a long lock in period. (You cannot touch the money in these financial instruments for a fixed time period).

Name of the instrument Lock in
Public Provident Fund 15 Years
5 Year tax saver fixed deposit 5 Years
NSC 5 Years and 10 years
Unit linked investment plan 5 Years
Senior citizen saving scheme 5 Years

Your money remains safe but the returns are lower than say an ELSS. The long lock in period means you need to be very sure of the investment you are making as you cannot touch this money for 5 -15 years depending on the lock in of the investment. If you are an aggressive investor you can invest in an ELSS which has a lock in of only 3 years. You learn from this article that tax planning needs to be done keeping your financial goals in mind. No insurance agent or even a friend can know your financial goals. Only you know your financial goals. You need to invest only in those tax saving instruments which match your financial goals.Think beyond taxes.

Financial Planning
Tax Planning
Investment Planning