Tax-planning imperatives: The basics don’t change

With a little over a month left in this financial year, saving on tax is predictably the buzz everywhere. Those who haven’t yet made their tax-saving plan or investments are looking at the possibilities and options available. But, of course, there will always be a sizeable population that wakes up only with hours to go.

DNA Money put together a high-powered panel to discuss the options before investors at this point in time.

The panel:

Bhargava Vatsaraj, principal partner, Vatsaraj Chartered Accountancy

Sandeep Shanbhag, director, Wonderland Consultants, a tax and financial planning firm

Suresh Sadagopan, a certified financial planner who runs Ladder 7 Financial Advisories

Sanjay Santhanam, director — sales & marketing, Canara Robeco Asset Management Company

Sanjay Tripathy, head — marketing, HDFC Standard Life Insurance Company

Kanu Doshi, tax-expert and dean — finance,      Welingkar Institute of Management

Sujit Ganguli, head — marketing, ICICI Prudential Life Insurance Company

Excerpts from the discussion

How has tax planning changed over the years?
Kanu Doshi: Earlier, if you paid tax, you were a high net worth individual (HNI). You had to be a HNI to pay tax at 97%. Life insurance premium was the first tax-deduction avenue. Tax-saving has undergone a lot of changes since then, from a deduction, to a tax rebate, to a deduction from the gross total income. To my mind, the tax rebate was the most efficient way. As we go along, we will come into EEE (exempt-exempt-exempt) from EET (exempt-exempt-taxed) today.

Bhargava Vatsaraj: Originally, there used to be Section 80 (L). Today, too, people come and ask me whether I will get a deduction of bank interest of up to Rs 6,000-12,000 under 80 (L). That is no longer there and has been done away with 3-4 years ago.
Why are Indians so obsessed with tax planning?
Sandeep Shanbhag: The obsession with tax planning is that earlier 97% of income was taxed. That has been diluted, but even today, 30-33% of income is given to the government. Perhaps we feel as a society that we don’t get anything out of it, so it is better to conserve money.

How has life insurance industry changed as far as tax saving is concerned?
Sujit Ganguli: When the life insurance industry was started, tax was one of the main drivers. While it still remains that driver, over the years, people are realising that while tax is an important thing to look at, it is also essential to look at what one would achieve through that investment. We are seeing a certain amount of shift that is happening where the people are looking at the purpose of the investment.

Sanjay Tripathy: Before private life insurance started, most of the life insurance sold was for tax benefits. People remained practically under-insured. What the private life insurance players did was they focused on financial planning. Once you do proper financial planning, you can make the person realise not only savings needs, which endowment plans offered, but also whether you need to plan for your child’s education, your retirement and even health insurance. Previously, the focus was on ‘what if I die young’. Now, the focus is gradually shifting to ‘what if I live more’.

How has the mutual fund industry evolved over the years, as far as tax planning goes?
Sanjay Santhanam: If you were to look at why tax-saving mutual funds were included in Section 80 (C), it was to bring the equity investing cult into the retail space. Has the equity investing cult started? My own ground observations tell me that it has not. If you look at history, this is probably one of the most difficult times for people to put money in equity. Are they putting money into equity? No. Is money coming into tax funds right now? Yes. But is it anything similar to what came in last year? No. This happens because tax planning always gets crammed in the last three months.
In the investors mind, there is a distinct dichotomy, investing is one thing and tax planning is another thing. Tax planning is what I do to save my liability. Investing is what I do over the longer term. But are you really directing money toward equity through tax proposals? Equity is probably one of the most tax friendly of investments. Any stock held on to for more than 12 months is completely tax-free. Equity MFs are the only ones where dividends are not subject to dividend distribution tax.

Sandeep Shanbhag: The question to be raised is why the government is pinpointing tax saving to do with mutual funds investing only in the equity market. Tax-saving needs to be encouraged across the capital markets and not only into equity markets. We have fixed-income based tax-instruments available. Insurance companies get into all kinds of fixed instruments and get tax rebates. Why is it that tax saving on mutual funds is limited only to equity linked savings schemes?

Will the investments improve if the markets improve?
Sanjay Santhanam:  That is a very difficult question. The way to look it at is that this is a cyclical industry, highly dependent on sentiments. And to that extent, nobody can really predict when the sentiments will improve.

Has the attitude toward tax planning changed?
Suresh Sadagopan: We advise people as to where to invest money - it may be mutual fund, it may be insurance or it may be even the Public Provident Fund. The fact is that people are not aware. There are some things which are taxed at the end and some things which are not. They talk in the same breath about NSC and PPF.

For people who come to us for ad hoc investments and ad hoc planning, they just want to save tax. There is nothing called asset allocation. They want to save tax because they don’t get anything out of it. Ultimately, they pay 33% at the highest level and there are so many other taxes.

What really happens in many of the cases is that there is a mismatch of investments. Over a period of time, they realise they have put something in PPF, in insurance, in NSC and not necessarily what they require. They may have taken some endowment plan because some uncle asked them to take.

Sujit Ganguli: If an investor is taking a rushed decision in the last two months, there is a possibility that he would land up in a wrong instrument. On the contrary, if he starts early, he can look at what is the asset allocation he wants to get into and what is the term he wants to get into — there are products which give a tax break for three years and there are products that give a tax break and need you to stay in the plan for a longer period of time.

Most research shows that the primary need for long-term investing in this country is to save for your child’s future. I think if those decisions are taken — time, asset allocation and goal — there are a lot of avenues for an investor to plan for these and save tax.

In some places, approach it from the reverse and say what will help me save tax and then choose the instruments, which is like putting the cart before the horse.

Sanjay Santhanam: What people lose track of is that when you are rushing to save tax, you don’t worry about the efficiency of the instrument.

How was it earlier? Has it changed over years?
Kanu Doshi: Tax has always been a driving force. The basket of investments is getting bigger, so more instruments are being added. I came across a wonderful observation of Warren Buffett. He said, “If you have any investment instrument, which is supported by some tax saving, shun it, as a good investment instrument must be standalone good.”

Is the increasing number of options helping customers?
Bhargava Vatsaraj: There are 22 tax saving options, I am told. If I have to go and shop in a huge shopping centre, I avoid because I get confused.

What needs to be addressed is that there is no social security available for the taxes that you have paid. In the western world, you pay taxes for 10-20 years and then in a lot of respects, the government gives it back to you. Here, what you give is lost.

Are there attitudinal changes?
Sandeep Shanbhag: All of us know that it is in the last three months that investments are made. People need to realise that our tax-saving investments are not different from normal investments. Mr Buffett maybe was talking from the American context, but if you see here, PPF, bank deposits, insurance, mutual funds and post-office schemes — these are all the instruments that offer tax breaks. If you are going to shun these are the instruments, where will you invest? These are the same instruments that you would otherwise invest in for your financial goals and the tax is just an additional icing on the cake. This is something people do not realise and hence they wake up and say now is time to make my tax-saving investments.

What is the best way to invest considering the current scenario?
Sanjay Tripathi: Financial planning needs to look at age, risk profile, term and overall life course for which you need to do the financial planning. Then, you should look at how smartly you can use the instruments to save tax. Tax provisions can change tomorrow. But if you take an instrument for 20 years, and tomorrow the provisions change, you should not be at downside, because you have invested only from the tax purpose. You also need to take a look at the liquidity of the instrument. Tomorrow if I need some funds, can I take money out of it? What is the liquidity?

Other than this, so many instruments have been put under Section 80C, Rs 1 lakh limit is anyway covered for most people. What people are missing out is that they are not looking at the deduction available for buying health insurance under Section 80D. Only 14% of the people have some sort of health insurance. The maximum deduction available under this is Rs 35,000. 

Suresh Sadagopan: There is a funny point to that, if I may add. See, there are a whole lot of people who say they somehow got aware of the medical insurance thing being used for tax saving. In a whole lot of cases, I find they are already covered properly in their own companies. But still, they want a medical insurance policy. “What if I migrate from this company to another company?” I say fair enough point. You take suppose Rs 5 lakh insurance, the premium for which let’s say comes to Rs 8,000. Then they will say, “No, no, somehow you make it Rs 15,000. I want to save on that tax.” The point is, just because you want to save tax, you shouldn’t take insurance beyond what is required.

At your practical level, do you see people realising the importance of financial planning?
Sandeep Shanbhag: Tax planning is a part of financial planning. For example, we now talked about recession and tax planning. To put it one sentence, basically though we are not into a recession-recession kind of thing, money is tight. At the end of the day, you have to keep aside some money for the tax-planning, tax-saving purpose. Here, we come up with ideas. For example, you can use your past tax savings for your current year tax savings. So you can simply withdraw what you had invested three years back, say in an in a tax-saving mutual fund and just redeploy that money. So without investing a single rupee, you can get the entire tax saving done.

The other thing which is very obvious, but people don’t do, is make your tax-saving investment at the beginning of the year, rather than at the end of the financial year. The simple thing is, you earn much more interest. At the end of the day you have to make that investment anyway, so why wait till March?

Also, people think SIP (systematic investment plan) has only to do with mutual funds. But basically, it is a standard way of investing. Come March, Rs 1 lakh is required for tax saving, and I don’t have Rs 1 lakh. That is why I cannot avail of the full potential. So, why not keep Rs 8,000-9,000 aside every month and make your tax-saving investments like you make your other investments?

Why are the people not thinking about this?
Sanjay Santhanam: See, the problem is that it is a very complex world, especially with the number of tax-saving instruments having increased. And it is very easy to just throw up your hands. For example, it is very easy to club all your investments into Section 80C and say that they are all fungible. But they are not. They have different maturity periods. There interim payouts are treated very differently and even there maturity periods are treated very differently. There is no understanding of that.

The second important thing that people look at is, they think in terms of equity and debt. They don’t think in terms of goals. And as an industry, we are also guilty of that. We bring out equity products; we bring out debt products; and we bring out hybrid products. How many real goal-oriented products are brought out? I think there is a crying need for that. I think education products and retirement products are the forte of this industry, but unfortunately, we haven’t been able to bundle those kinds of products. And if those products come with the advantage of tax saving, they will be a hit.
On a scale of 1 to 10, how much are people losing by not planning?

Sanjay Santhanam: I guess people are losing nine out of 10 by not planning.

Bhargava Vatsaraj: I would like to make a point here. Typically, when a client comes to a chartered accountant, he would ask where to invest. Let me confess that we CAs are not as literate as financial planners are. Out of the 22 modes of investment that are available for tax planning, we know only seven, eight or maybe nine. So, I believe it would help if CAs who are in practice are made more aware.

Sandeep Shanbhag: I completely disagree with this. We CAs are far more qualified than persons who actually sell mutual funds and insurance. Because of rampant mis-selling, people are getting their fingers burnt time and again. So I hope and pray that chartered accountants are the ones who advise them instead of the people who sit in front of the internet, pass advice and sell insurance and mutual funds. Regulators have to do something significant about it because right now, next to no qualification is required to sell life altering products like mutual funds and insurance.

How do we increase financial literacy?
Kanu Doshi: There is a major responsibility on newspapers to increase financial literacy.

The language youngsters best understand pertains to the gains possible…
Kanu Doshi: To come to Vatsaraj’s point on CAs, who are filing taxes, playing so vital a role, it may not apply in the context of the young crowd. They may be open to receiving suggestions from our friends from the mutual fund industry, independent of what the CA says. They may not even ask the CA. That trend will come, whether we like it or not.

What is the flavour of the season?
Sandeep Shanbhag: The flavour of the season is fixed income instruments, which are perceived to be safe, but need not necessarily be safe. People are chary of investing in tax-saving schemes because of the crash. I am saying that if you invest Rs 1 lakh straightaway, you have got a return of 34% at the top level. So the market has to go down by 34% for me to actually lose money on the investment, which is a no-brainer. If anything, one has to invest in an equity product like tax-saving mutual funds.

How has the response to capital guarantee products been?
Sujit Ganguli: The response has been good (referring to the product launched by his company recently). Through a large number of consumer meets, we sensed that somewhere there was an all-pervasive fear that what happened in the United States may also happen in India. So, we put out communications saying insurance companies don’t invest in property and we invest only in India. So, what we have done is we have is we have launched a return guarantee fund.

But aren’t you getting into dangerous territory. When you guarantee something, you might get into a situation wherein the company might have to pay out of its own pocket?
Sujit Ganguli: It depends on the rates of guarantee that you give. It is critical to be very clear about the rate of guarantee you are giving. We have tried to keep the communication very clear to say this is the NAV you will get at the end. As long as we don’t get overambitious, we should be safe.

Kanu Doshi: Forget the returns, there is a hazard in even guaranteeing the principal amounts. UTI is a classic example, which ran into major problems for guaranteeing the principal.

Sujit Ganguli: With interest rates coming down and bond prices going up, we should be able to earn a reasonable rate of return. We should be fine.

Sandeep Shanbhag: If one does, others have to follow. As an industry, in the market, guaranteeing anything is very dangerous, as we have repeatedly found through UTI and other mutual funds. 

Are people getting back to post office schemes?
Suresh Sadagopan: People have been asking about PPF and increasing PF contribution and getting into NSC and all that. We tell them not to look at the situation as it exists today. The situation was great one year ago. Today, it’s dismal. It may not stay this way. What has come down will also go up. Actual planning is on whatever goals they have. We take a fairly long-term view. We take a view
on a couple of decades. We look at retirement and beyond. We have several meetings. It’s not in just one meeting.

Transcribed by Khyati Dharamsi & N Sundaresha Subramanian