Most of what we do with respect to tax saving, planning, investment whichever way you call it is going to be of little or no use in years to come.

The returns from such investments are likely to be minuscule and or they may not serve any worthwhile use of your money. Tax planning is very strategic in nature and not like the last minute fire fighting most do each year.

For most people, tax planning is akin to some kind of a burden that they want off their shoulders as soon as possible. As a result, the attitude is whatever seems ok and will help save tax – ‘lets go for it’ - the basic mantra. What is really foolhardy is that saving tax is a larger prerogative than that of utilisation of your hard earned money and the future of such monies in years to come.

Like each year we may continue to do what we do or give ourselves a choice this year round. Let’s think before we put down our investment declarations this time around. Like each year product manufacturers will be on a high note enticing you to buy their products and save tax. As usual the market will be flooded by agents and brokers having solutions for you. Here are some guidelines to help you wade through the various options and ensure the following:

1. Tax is saved and that you claim the full benefit of your section 80C benefits
2. Product are chosen based on their long term merit and not like fire fighting options undertaken just to reach that Rs 1 lakh investment mark
3. Products are chosen in such a manner that multiple life goals can be fulfilled and that they are in line with your future goals and expectations
4. Products that you choose help you optimise returns while you save tax in the immediate future.

(Also read - Perfect Investment: Does it exist? )

Strategic tax planning

So far with whatever you have done in the past, it is important to understand the future implications of your tax saving strategy. You cannot do much about the statutory commitments and contribution like provident fund (PF) but all the rest is in your control.

Let us begin...

1. Insurance
If you have a traditional money back policy or an endowment type of policy understand that you will be earning about 4% to 6% returns on such policies. In years to come, this will be lower or just equal to inflation and hence you are not creating any wealth, infact you are destroying the value of your wealth rapidly.

Such policies should ideally be restructured and making them paid up is a good option. You can buy term assurance plan which will serve your need to obtaining life cover and all the same release unproductive cashflow to be deployed into more productive and wealth generating asset classes. Be careful of Ulips; invest if you are under 35 years of age, else as and when the stock markets are down or enter into a downward phase. Your Ulip will turn out to be very expensive as your age increases. Again I am sure you did not know this.

2. Public Provident Fund (PPF)
This has been a long time favourite of most people. It is a no-brainer and hence most people prefer this but note this. The current returns are 8% and quite likely that sooner or later with the implementation of the exempt exempt tax (EET) regime of taxation investments in PPF may become redundant, as returns will fall significantly.

How this will be implemented is not clear hence the best option is to go easy on this one. Simply place a nominal sum to keep your account active before there is clarity on this front. EET may apply to insurance policies as well.

3. Pension policies 
This is the greatest mistake that many people make. There is no pension policy today, which will really help you in retirement. That is the cold fact. Ulip pension policies may help you to some extent but I would give it a rating of four out of ten. It is quite likely that you will make a sizeable sum by the time you retire but that is where the problem begins.

The problem with pension policies is that you will get a measly 2% or 4% annuity when you actually retire. To make matters worse this will be taxed at full marginal rate of income tax as well. Liquidity and flexibility will just not be there. No insurance company or agent will agree to this but this is a cold fact.

Steer clear of such policies. Either make them paid up or stop paying Ulip premiums, if you can. Divest the money to more productive assets based on your overall risk profile and general preferences. Bite this – Rs 100 today will be worth only Rs 32 say in 20 years time considering 5% inflation.
 
4. Five year fixed deposits (FDs), National Savings Scheme (NSC), other bonds
These products are fair if your risk appetite is really low and if you are not too keen to build wealth. Generally speaking, in all that we do wealth creation should be the underlying motive.

5. Equity Linked Savings Scheme (ELSS)
This is a good option. You save tax and returns are tax-free completely. You get to build a lot of wealth. However, note that this is fraught with risk. Though it is said that this investment into an ELSS scheme is locked-in for three years you should be mentally prepared to hold it for five to 10 years as well.

It is an equity investment and when your three years are over, you may not have made great returns or the stock markets may be down at that point. If that be the case, you will have to hold much longer. Hence if you wish to use such funds in three-four years time the calculations can go wrong.

Nevertheless, strange as it may seem, the high-risk investment has the least tax liability, infact it is nil as per the current tax laws. If you are prepared to hold for long really long like five-ten years, surely you will make super normal returns.

That said ideally you must have your financial goal in mind first and then see how you can meet your goals and in the process take advantage of tax savings strategies.

There is so much to be done while you plan your tax. Look at 80C benefits as a composite tool. Look at this as a tax management tool for the family and not just yourself. You have section 80C benefit for yourself, your spouse, your HUF, your parents, your father’s HUF. There are so many Rs 1 lakh to be planned and hence so much to benefit from good tax planning.

The author, Kartik Jhaveri, is an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at kartik.jhaveri@transcend-india.com.

Disclaimer:

The contents of the above articles are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision.

More artricles by the author:

7 deadly sins of financial planning

Fat salary but zero bank balance? Stop that cash leak

Buy strategy not products

Choices reveal your personality, so who are you?