Last minute Tax Planning Tips
Stick to basics:
Financial planning is the core strength of an investment portfolio. If there is no financial plan, there is a possibility that your investments may not help you achieve your financial goals. It is highly unlikely that you can catch a financial planner and get a financial plan made for yourself in just a few days and implement it. It requires time. This means that you are entering a territory with no map on hand. So, avoid financial products that you do not understand. There are many financial products such as regular premium life insurance policies with 15 or 20 years term. For a while, please stay away from them. You need some time on hand and expert advice to understand such complex products. Worse is, if you make a mistake in your calculations, you may end up paying for very long period of time. Hence, keep your investments simple- simple to understand and simple to exit from it, when required.
Many individuals have only one amount in their minds– Rs 1 lakh. For them, they need to invest Rs 1 lakh to get the tax deduction under section 80C. But reality may differ. In some cases, your taxable income may be low. Or there are some cases where you have already invested in some investment compliant asset class or have paid some premium of an old life insurance policy. Account for all such investments and then arrive at a final number. Quantify how much you need to avail the tax deduction. You can also avail of deduction of Rs 15,000 (Rs 20,000 in case of senior citizens) under section 80D in case you pay some premium for health insurance.
As there are a few day left for the tax deadline, there are limited options you have in hand. You can consider investing in national saving certificate available at post offices. For a five-year term your money accumulates interest at a rate of 8.6 percent per year. Recently, government has announced that the rates on NSC will be slashed by 10 basis points to 8.5 percent from April 1. Hence, better invest now and lock in the rate of interest and save tax too. You can also make a tax saving bank fixed deposit with a commercial bank. You can earn an interest between 8.5 percent to 9 percent for a five-year term. If you are young, you may also open a Public Provident Fund (PPF) account. A point note here is PPF account comes with a commitment of 15 years. These options work well for conservative investors. But if you are willing to take a risk, you can also consider mutual funds offering tax breaks.
In recent times, stock markets are moving downwards and valuations are attractive for an investor. You can invest up to Rs 1 lakh in equity linked saving schemes, popularly known as tax saving mutual funds, to avail tax deduction under section 80 C. These schemes come with a lock-in of three years and invest in equities. If you are a first-time investor in equities and have income below Rs 10 lakh, you can also invest Rs 50,000 in Rajiv Gandhi Equity Saving Scheme too.
Most of these investments can be done in a day or two and you can make it before the 'd' day. But that does not mean you should relax till the last week of March 2014. The beginning of April 2013 should be an appropriate time to plan your taxes for the next year.
02 Dec - 10:00 hrs
Founder & CEO, Right Horizons