Start tax planning in the new financial year: Five things to do

A new financial year has started. If you are the type who leaves tax planning to the end of the financial year (in the month of March), this is the time to wake up and start planning. Here are five things that you need to get started:

Get yourself a permanent account number (PAN)
Starting April 1, 2010, on all transactions that require tax deduction at source, the higher of 20% tax rate or the prescribed tax rate will be deducted if the person does not produce a PAN. Now let us understand that mumbo-jumbo through an example:

Let us say you have a number of fixed deposits with a bank and the total interest earned on these fixed deposits comes to more than Rs 10,000 this financial year. If you produce a PAN, the bank will deduct TDS at the rate of 10.3% (10% tax plus 3% education
cess on the tax) on the interest earned on the fixed deposit. If you do not produce a PAN, the bank will deduct TDS at the rate of 20.6%. This change comes in as per Section 206AA introduced by Finance (No. 2) Act, 2009. Moral of the story: get a PAN.

Start a Public Provident Fund (PPF) account
For the risk-averse, a PPF is the best long-term investment going around. It guarantees an interest of 8% every year and comes with a lot of flexibility. Given that the proceeds at maturity are currently tax free, the after-tax return comes out to 8% per year. The best part is that this return is guaranteed by no less than the government. In case of PPF, a minimum contribution of Rs 500 per year and a maximum contribution of Rs 70,000 per year can be made. This contribution can be claimed as a deduction under Section 80C of the Income-Tax Act, which allows for a deduction of a maximum of Rs 1 lakh per year. Of course, PPF is a long-term mode of investment — the account matures 15 years after the end of the financial year in which you first start investing. So say you start a PPF account today, i.e. April 2, 2010. The current financial year ends on March 31, 2011. Now we add 15 years to this i.e. March 31, 2011 + 15 years = March 31, 2026. The account will mature a day after, i.e. April 1, 2026. If you invest Rs 70,000 every year in the PPF, you will receive Rs 21.23 lakh at maturity, guaranteed and tax free. No other mode of investment guarantees such a high rate of return for such a long period of time. Given this, PPF is an ideal way of building a fund for your child’s education needs.

Start a systematic investment plan (SIP) on a tax saving fund
If you are the kind who can take on some amount of risk and at the same time want a tax deduction for the money you invest, start an SIP on an equity-linked savings scheme or tax-saving mutual fund as they are better known as, right away. An SIP will entail investing a fixed amount of money every month in the fund. So if you want to invest Rs 30,000 in tax-saving MFs, start an SIP of Rs 2,500 per month, instead of waiting for the end of the year to invest. By doing so, you do not feel the pinch of Rs 30,000 going at one go towards the end of the year. Investing regularly will also save you from the gyrations of the stock market, to some extent.

Buy a term insurance policy
The Compact Oxford Reference Dictionary defines the word insure as “arrange for compensation in the event of damage to or loss off (property, life or person), in exchange for regular payments to a company.” Most so-called insurance plans being sold in India are unit-linked insurance plans which are essentially mutual funds which come with some amount of insurance cover as well. On the other hand, a term insurance policy is a pure life insurance policy. In a term insurance policy, in case of death of the policyholder during the period of the policy, the nominee gets the “sum assured” (or the cover amount, as it’s commonly known). And if the policyholder survives the period of the policy, he does not get anything. This is one reason why people are averse to buying term insurance — they do not get anything if they survive the period of the policy. But the point to remember is that by buying a term insurance policy, you are essentially trying to ensure that your dependants have enough money to go around in case something where to happen to you. Insurance agents are averse to selling term insurance primarily because such plans have the lowest premium among all the different insurance plans. And given this, insurance agents do not earn high commission from it.

Stay away from unit-linked investment plans (Ulips)
Unit-linked investment plans (Ulips) remain one of the most popular ways of saving tax. Ulips are insurance policies that club insurance and investment. Usually, the individual taking the policy has 4-6 choices while choosing his investment fund, ranging from funds which invest 100% in equity to funds which invest 100% in debt securities. Other than this, the policyholder gets an insurance cover as well, for which the insurance company charges a mortality premium every month. Such plans typically pay high commissions to the agents upfront and hence, agents have a great incentive in pushing Ulips instead of selling pure term insurance policies. Over and above this, the expense structure of Ulips offered by different insurance companies is different. Therefore, there is no way to figure out the best performing Ulips. Don’t fall for the bogey used by insurance companies against mutual funds, that MFs are for the short term whereas insurance is for the long term. Mutual funds are as long-term as you want them to be — all you have to do is stay invested and not withdraw your money.