Tax planning is not financial planning: Want to know why?

Usually, it is noticed that last quarter of the financial year is when investors start looking at tax planning and then there is a rush to buy tax-saving schemes.

Answering a query on whether financial planning should come before tax planning, Sumeet Vaid, Freedom Financial Planners, said in an interview to CNBC-TV18 that financial planning should be the starting point and it should start early in the year rather than in the last quarter. So, financial planning should include tax planning and not vice-versa. Read more: Experts say lure investment with competitive not higher taxes However, in India, it is other way round. Indians, usually first figure out the tax saving products and then see whether it fits into their financial life. Thus, we get into this trap of investing purely because of tax planning. Basically, "Financial planning should articulate your income, articulate your expenses, and articulate your savings," he added. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Understandably, last quarter is tax planning time, what should be priority for an investor, tax planning or overall financial planning? Can we sometimes miss the picture on financial planning by getting absorbed in tax planning? A: India is a very unique country where 90 percent of our investment decisions happen because of tax planning. If you look at any new scheme, anything that has a tag of tax planning scheme, tends to get much more retail response than the normal thing. It is unique to an extent that many a times when investors do tax planning; they try and not understand what the liquidity impact is. Indians very easily in order to save tax, will go and lock in money for five years, six years or even lesser or more, without understanding the opportunity cost. However, what actually should happen is that financial plan should be a base document for any family. Just like any business has a balance sheet, which captures its income, expenses etc, similarly a family balance sheet is known as financial plan. So the basic starting point for any investment, any kind of financial planning, and any kind of finance oriented decision for a family is a financial plan. That should start well early in the year rather than at the last quarter. Financial planning should be the starting point, which should articulate your income, articulate your expenses, and articulate your savings, which is nothing but income minus expenses. Based on your goals, you should invest or decide to invest in products. While choosing products, you should figure out whether they have tax saving feature or not. However in India, it goes other way round. Indians usually first figure out the tax saving products and then see whether it fits into their financial life and 90 percent of the time it does not. So, then we get into this trap of investing purely because of tax planning. Q: You were talking about the products; in the last quarter of the year, which are the tax-saving products that you would recommend investors to take up? A: First and foremost, get adequate insurance for yourself. After you get adequate insurance, move into health insurance. If you are still left out with some savings or some more tax planning to do then get into Public Provident Fund (PPF), Employee Provident Fund (EPF) and other kind of investments. Q: If you want to make a complaint with regards to mutual fund company because so many people feel that they get cheated from many of these private companies, where do you post your complaint? A: My recommendation will be to bank on to Securities and Exchange Board of India (SEBI) in a very proactive and positive manner because they are doing a fantastic job with respect to investor awareness and investor complaint redressal. One can post complaint visit on the website, http://scores.gov.in.