Last Minute Tax Planning Can be Hazardous To Your Financial Health
Ashwin (31), was informed by his HR department to submit his investment proofs for the financial year by the weekend failing which they would not accept any proofs after the deadline and the tax would be deducted accordingly. Coincidentally, he received a telephone call from his friend who had just joined a life insurance company as an agent and he shared information on a so called “wonder plan” which could save tax as well as give good returns. Knowing that he had little choice and dearth of time to consult anyone, Ashwin succumbed to the offer and shelled out Rs 50000 for the insurance plan and managed to submit the receipts on time to claim the tax benefit.
Gopinath(42), who runs a successful garments business visited his bank on 30th march and on the advice of one of the banks executives, invested Rs 100000 in a 5 year tax saving fixed deposit in order to complete his tax saving investments for the year.
In both the cases, the situation is not new. Both have gone through this similar situation in the past several years but they refused to learn from their mistakes.
Tax planning is an exercise which needs to start right at the beginning of the new financial year. In order to maximize benefits of your tax saving investments, you need to align it with your financial goals
In order to enable you to start planning your tax saving investments in the early part of the year, I have enlisted a few good schemes which can fit in your objective of tax saving as well as good returns.
Public Providend Fund
Public Providend Fund is a very good option especially for the self employed for retirement purposes as it is a 15 year investment product and provides a steady return (8.6% at present) along with tax free status at maturity. Since in PPF the interest is calculated on the lowest balance between the 1st and the 5th of the month, it’s advisable to invest a lumpsum amount before 5th April itself to earn interest for the whole year. For those who cannot invest lumpsum, kindly ensure that the monthly deposits take place before 5th of every month.
Equity linked savings scheme (ELSS)
if you have “Children’s educational funding” as one of your long term goals, you can consider investing in ELSS mutual fund schemes which are capable of providing inflation beating returns, over long term. If one is aware of this goal then the investment can begin from the 1st month of the financial year itself (which is April) in monthly investment mode which is popularly known as SIP or Systematic investment plan. One needs to first understand the risk-reward equation here before investing in ELSS schemes as due to stock market fluctuations, your investments here can be in the negative territory for some time. In the proposed Direct Tax code which is supposed to be now implemented from 1st April 2013, this investment has been excluded. So you may still be able to take the benefit of this scheme till March 2013.
Statistics seems to suggest that the humble fixed deposit seems to be one of the most popular products, for last minute tax savings. This product comes with a 5 year lock-in during which you cannot withdraw from the scheme. The lowdown here is that the interest earned on this deposit is treated as income and taxed as per your slab. Someone looking for assured returns without any risk and for a medium term goal can certainly go for this option.
Life insurance policies should be essentially seen from the point of covering your liabilities and to provide sufficient insurance cover to take care of the loss of income due to the untimely death of the bread earner. But most of us make the mistake of treating insurance as investments and end up investing a sizeable portion of the tax saving component in investment linked insurance plans which might not provide the perceived returns and adequate cover. For someone who is young and has a family, the tax planning should begin with taking a term insurance plan of appropriate sum assured. Deciding on the insurance cover early can save you from repeating the mistake which Ashwin did. Even pension plans offered by life insurance companies can be avoided due to the high charge structure and rigidity at the time of maturity. All single premium policies and high premium-low cover policies also won’t be able to claim any tax benefits once DTC is implemented.
Sickness and disease can affect anyone at any age level and therefore it makes sense to take up a medical cover early in life inspite of your employer providing you a group medical cover. It not only saves tax but also provides protection from unexpected hospitalization.
No one benefits from last minute tax planning unless someone can afford to bear the negative financial consequences of wrong investment decisions.