Tax Planning

Singnificance of Tax Planning

1. In the last budget, finance minister introduced Section 80C replacing Section 88, wherein we can claim deductions up to Rs.1,50,000 by investing in instruments eligible u/s 80C. From financial planning perspective, section 80C also gives us an opportunity of doing insurance planning, retirement planning and investment planning apart from tax planning. Hence a diligent tax planning would also make a successful investment planning!
2. Taxation is a fundamental element of all financial planning considerations – investments, retirement planning, and estate planning. On one hand it is duty of every citizen to pay due tax, on the other hand every citizen has also all the rights to save/reduce taxes by claiming tax rebates and exemptions. The process of reducing or minimizing tax liability by availing tax concessions provided in the Income Tax Act and can be defined as “Tax Planning”.
3. As financial planning involves asset allocation, insurance planning, retirement planning, Debt management, investment planning etc.. Therefore it is rightly said –tax planning is incidental to financial planning and not an end in itself.
4. Section 80C provides the best path for us to make investments across all major asset classes specified therein to fund our financial goals and at the same time minimize tax out go. The Rs. 1,50,000 deduction is irrespective of how much we are earning and under what tax bracket we fall. A well-thought and finely structured strategy on investments u/s 80C can go a long way not just in saving on taxes but also invest for our future financial goals.
5. So investing in the instruments eligible under this section is not just about where we are going to get maximum returns or which one is the least risky but also we need to think about liquidity of investments, risk profile, current financial situation, mapping the investment to our future goals and host of other aspects related to our Financial Planning.
6. The real challenge lies in how to allocate Rs 1,50,000 among the instruments available u/s 80C. The various options available include ELSS, ULIP, PPF, Home Loans, Pension Plans, Life Insurance, PF , School/College Fees. We can come out with the best strategy if we consider our current financial situation and financial goals in the coming years while structuring the portfolio for deduction u/s 80C. That is meeting life’s financial goals through holistic planning, execution & monitoring of personal finance.
7. >So it becomes essential for an investor to plan his taxes not only to minimize the tax outgo but also from a financial planning point of view keeping in view time horizon of investments made to save taxes, salary structure, liquidity concerns etc. essentially based on the age, gender, dependence, commitments etc.
8. Low risk instruments provide a parking for saving some money. But in reality some of them do not even provide capital protection. For those aiming at wealth creation there can not be any investment decision without an element of risk. Mutual Fund based instrument like ELSS, ULIPs, have disciplined investment provision like Systematic Investment Plan or SIP. SIP investments have time and again provided superior returns.
9. Tax planning therefore is not just optimizing of taxes at the end of every financial year but in fact to plan the finances keeping in view the life’s progressive stages. That is through effective allocation of current resources available on a monthly or annual basis.
10. As liquidity is the a major concern during Tax Planning, it is a prudent activity of utilizing and allocating the funds/reserves in a manner to provide liquidity whenever required.
11. However to make a wise investment decision one must essentially analyse ones own needs like risk appetite, time horizon, financial commitments & expectations, savings.
capacity etc.