Tax planning must match risk profile, goals

January-February-March (JFM period) is that period of the financial year where tax planning is a priority for most of us. Mutual fund houses and insurance companies go into an overdrive marketing investment products that qualify for tax saving.

Delay in tax planning often results in hasty decisions, which are most often wrong. Making last minute provision for funds usually leads to unnecessary stress and ad-hoc investments. We end up investing in unsuitable tax saving schemes, which eventually may have an adverse impact on our cash flows and future return prospects.

This can be avoided by planning all tax related investments in advance. Having a plan in place will help one take better decisions and even reduce the financial burden at the end of the year.

If possible, one should start planning at the beginning of the financial year itself, or one can also consider investing in tax-saving instruments throughout the year in a systematic manner.

We must avail all tax deductions and exemptions available under various sections of the tax law. Firstly, one should look at section 80 C, where one can avail tax deduction up to Rs 1.50 lakh per individual assessee and Hindu Undivided Family.

For someone in a higher tax bracket of 31.2%, by investing in Rs 1.5 lakh (in investment options allowable under this section) one will save tax of Rs 46,800, which is a significant amount.

There are various investment options under section 80C:

First, look at following options to avail the amount of Rs 1.50 lakh

• Tuition fees for children
   
• Contribution to EPF or VPF (applicable to corporate executives)
   
• Life insurance or pension plan premiums (single premium policies are not eligible for 80C).
   
• Principal portion of Equated Monthly Installment (EMI) of home loan
   
• Stamp duty, registration charges if house is bought in the financial year

If limit is still not exhausted from the above, one can choose to invest in the following options:

• Equity Linked Security Schemes (ELSS): A high-risk investment with market-linked interest returns and a lock-in period of three years. Long-term capital gains tax @10.4% on gains above Rs 1 lakh post considering grandfathering of January 31, 2018 value.
   
• PFF (Public Provident Fund): A low-risk investment with 8 % interest and a lock-in period of 15 years. No tax on returns.?
   
• Fixed Deposits (FD): A low-risk investment with approximately 7-7.50% interest depending on the bank and a lock-in period of five Years. Taxable on maturity. ?
   
• Sukanyasamridhi: A low-risk investment with 8.5% interest and a lock-in period of 21 years. No tax on returns. ?
   
• Senior Citizen Saving Scheme (SCSS): A low-risk investment with 8.7% interest and a lock-in period of five Years. No tax on returns.?
   
• National Saving Scheme (NSC): A low-risk investment with 8% interest and a lock-in period of five Years. Taxable.

Apart from above, National Pension Scheme also qualifies for investment under section 80C. Due to complexity and long lock-in period, we do not recommend one to opt for it even if there is additional benefit of investing Rs 50,000 in the same.

In addition to Rs 1.50 lakh relief available for investments under section 80C, there are other deductions also that one should look at. These include premium paid for health insurance and check-ups for self, spouse, children and parents; interest on repayment of housing loan and interest paid on education loan taken for higher education for self, spouse or children.

Each tax-planning instrument has a different underlying objective, and risk associated with it, which needs to be understood before investing. One's investment choice should be defined investment time horizon, return expectations, risk profile and financial goals.

The writer is founder of HappynessFactory.in