Start the year with tax plan to optimise returns

It’s that time of the year when most salaried employees have to submit their annual investment declarations / proof of investments for getting tax deductions.

Even the self-employed start thinking about their annual tax planning exercise around this time. And as is typical of many young working professionals, they sit on this till the last minute. Then, as the deadline approaches, a hurried cheque or two is written out.

Now, if this seems familiar, this article is meant for you. After all, it’s your hard-earned money and so, wouldn’t you want to put it to the best use? Everyone without exception would answer this question with a resounding “Yes”.

Most working professionals tend to find this entire process tedious and boring. They know that some money has to be invested which gets you tax deduction. Bottomline — less TDS and more income for the rest of the year. If that’s all one should be concerned about, then why bother with the planning and details, right?

Wrong. Because the cheque written today has got enormous ramifications on your financials tomorrow. So you better know what you are doing. Assuming you are serious about your job, and then you spend the better part of your day giving it your blood, sweat and tears. You are paid a salary in return. It is no different for the self-employed.

It is from this income that you save money for your future and that of your loved ones. So just because something seems tedious and boring doesn’t give a person good enough reason to be careless about it, especially when it is pretty simple and straightforward. And the ten minutes that you spend reading this is all the time that it will take. So do make the effort and it will pay you rich dividends - pun intended.

Let us understand that the maximum amount of tax deduction is limited to Rs100,000. Of this, reduce the total amount that has been deducted from your salary as your provident fund (PF) during the year. Of course, for the self-employed, this figure would be nil. Those who have taken a housing loan should also reduce the principal portion of the estimated monthly instalment (EMIs).

Now the balance left needs to be invested. For example, let’s take the case of a typical employee - Vikas. His PF was Rs60,000 for the year and he was living with his parents. So he needed to invest Rs40,000 (Rs1,00,000 - Rs60,000) more to reach the limit. Now, this Rs40,000 can be invested in a variety of instruments like bank deposits, life insurance, NSC, PPF, ELSS (tax saving mutual funds), post office deposits, etc. Space constraints preclude a detailed discussion of the pros and cons of each one of these, so we will spare our young working professionals the ‘tedium’ and ‘boredom’ and get directly to the point. Ignore everything else and simply invest in a combination of ELSS and PPF. If you are relatively young and just starting out, put 70% into ELSS and 30% into PPF. As you advance, lower the proportion in ELSS funds and increase the proportion of PPF, eventually reaching a combination of 30% ELSS and 70% PPF.

Of course, since each person’s situation is different, taking the advice of a financial planner (as against an agent) would be better than this kind of template investing—however, it would beat the last- minute frenzy as described above any day.

Now that the tax saving is taken care of, let’s go a step ahead. Beyond a point tax saving is simply not possible. So instead of fretting about saving tax, worry about optimising post-tax income. How do you do it? Perhaps by making a small modification to our mindset.

Normally, the amount we save out of our income is what we call savings. In other words, income minus expenses equal savings. Now for the almost presumptuous suggestion. How about income minus savings equal expenses? It’s the same equation, but redrawing it is infinitely more efficient as far as our finances are concerned. So starting next month, pre-decide how much you want to save out of your income and the balancing figure should automatically make up your expenses. Take care not to set too ambitious a target, you will end up just straitjacketing yourself, and the process will not continue for too long. So start small, and make adjustments as you go along. This strategy, while introducing an element of financial discipline, also ensures that too much of a pinch is not felt.

Finally, the above outlined principles apply not only to the salaried class but to everyone who wait till the last minute and are therefore forced to take decisions in a hurry. Tax-saving investments should be looked upon just as normal goal-oriented financial investments that also offer a tax break. Start at the beginning of the year instead of waiting till the end.

Doing so has a two-fold advantage. First, your tax-saving investments would earn a return from the beginning of the financial year. Secondly, often, many end up simply not having the lump sum required at one go. A much more efficient strategy would be to invest throughout the year in a staggered manner such that there is no liquidity pressure at the end of the year, where otherwise a lumpsum would be required to be invested for availing of the 100% tax saving.

The writer is director,
Wonderland Consultants, a tax
and financial planning firm.
He can be contacted at sandeep.shanbhag@gmail.com