Invest right to save your income tax

Anil RegoRight HorizonsThis is that time of the year when most of the people are looking up to the festive season.  It is a good time to talk about the tax planning which we can do for the current financial year so that we can be equipped to maximize on our tax saving potential. So, how do you go about saving on your income tax?  Read on to know more!Educate yourself The first and foremost step is to educate oneself on the following:-    The tax bracket under which one falls without any tax planning and with tax planning-    The various tax planning options available-    One’s saving capacity-    One’s monthly expenses-    Understand how much should be saved and invested per month to maximise on tax planning-    Planning on the expenses for the upcoming financial year-    Monitoring expenses and investments-    Seeking professional help, in case of needEducation holds the key, as it equips you with the requisite knowledge to leverage the various options available for an individual to save on income tax.Evaluate your optionsOnce you have educated yourself about the afore mentioned points, it is time to evaluate all the tax saving options that you have. You have to carefully weigh the merits and demerits of each tax saving option available. Furthermore, you have to surely evaluate your risk ability as it will help you choose on the tax saving options wisely.Strategize and investOnce you are aware of all the options on investments that you have, it is time to come up with a few investment strategies which you can adopt as per your situation. Some of the important facets of your investment strategies should be:It should be a mix of debt and equity tax saving instrumentsInsurance has to prominently feature to cover your liabilitiesYour strategy should be sustainable in the long run: there is no point trying to allocate 75% of your earnings to savings and plan based on thatShould leverage the lock-in periods in a manner so as to coincide their maturity  with your long terms needsYour strategy should give you enough room to pivot and change if the investments are not giving adequate returnsIllustrations on a few strategies:Case A:30 year old single with no housing loan and no other liabilities•    Income and Tax Bracket: Rs.6,50,000 (Rs.54,000 per month approx)•    Monthly Expense: Rs.25,000•    Targeted Monthly Savings: Rs.18,000 (Rs.2,16,000 annual)•    Tax Planning Strategy A (Moderate Risk Appetite): Basic Term Insurance Cover with a premium of around Rs.6000 (Sum assured between Rs.5-8 Lakhs INR)Medical Cover for self and parents (this premium can be anywhere between Rs.25000- Rs.50000 depending on parent’s health)Mutual Fund ELSS in SIP mode for about Rs.60,000 (Rs.5k/month)Rest in tax savings oriented bank FDs and EPF/VPF•    Tax Planning Strategy B (High Risk Appetite):ELSS for Rs.150,000 (SIP Rs.12,500)NPS invest Rs.50,000Basic medical cover worth Rs.16,000•    Taxable Income after planning: Rs.4,34,000As can be seen, immaterial of the strategy adopted, this person uses her/his savings to move from the 20% income slab bracket to 10% income slab bracket.Case B:44 year old married with housing loan and 1 kid•    Income and Tax Bracket: Rs.15,50,000 (Rs.129,000 per month approx)•    Monthly Expense: Rs.75,000•    Targeted Monthly Savings: Rs.30,000 (Rs.3,60,000 annual) •    Tax Planning Strategy A (Moderate Risk Appetite): Term Loan to cover home loan, kid’s education/marriage, and provide a basic retirement lump sum (Rs.30,000)Medical Cover worth Rs.50,000Retirement Insurance Plans Rs.100,000NPS Rs.50,000Rest in Savings account or bank FDs which give tax benefits•    Tax Planning Strategy B (High Risk Appetite):Term Loan to cover home loan, kid’s education/marriage, and provide a basic retirement lump sum (Rs.30,000)Medical Cover worth Rs.50,000At least Rs.100,000 and upwards in ELSS or equity oriented ULIPsRs.50,000 in NPSRest in ULIP pension plans•    Taxable Income after planning: In between the range of Rs.11,00,000 – Rs.12,50,000 depending on the interest paid on the home loan In the above illustration it should be noted that the tax planning has been done for more than the amounts eligible for tax exemptions. So, a person can replace ELSS with normal equity schemes from mutual funds, in case they feel they can gain more as they already have planned for their taxes.Also in the CASE B illustration, the person will save at least Rs.60,00 as their taxable income after planning.Choose your strategies wisely and invest to both increase your savings as well as save on taxes! A double treat!