WE are in the midst of what is popularly referred to as the 'tax-planning' season. If you are a salaried individual, your accounts team has perhaps asked you to furnish details of tax-saving investments for the year. Your investment advisor must have sent you reminders for investing in a plethora of tax-saving instruments. Look around and you will notice that advertisements for everything from tax-saving bonds, insurance products to tax-saving mutual funds (ELSS) have been plastered all over. Clearly, tax planning is in the air!
As investors, we are spoilt for choices when it comes to avenues for tax planning and their availability. However, a common mistake is the failure to give tax-planning the due time and thought it deserves. As a result, we fall prey to the practice of "being conventional" in the tax-planning exercise.
We rarely consider factors like which tax-saving avenue is the most apt for us (in terms of the risk-return trade-off) or even how to allocate monies between different options. Often, we end up making investments in avenues that we have traditionally chosen.
For instance, most of us tend to associate tax-planning investments with small savings schemes like the Public Provident Fund (PPF) and National Savings Certificate (NSC). There's nothing wrong with that. Indeed, the proposition of earning assured returns and safety of capital (thanks to the sovereign guarantee) will appeal to low-risk taking investors. But if you are an investor who can take on high risk in the quest for high returns, then ELSS (equity-linked savings schemes) could well be your calling.
Maybe, your tax-planning portfolio should have higher allocation to taxsaving mutual funds and a lower allocation to small savings schemes.
If your risk profile demands that you largely invest in assured return schemes, there is still a case for making an apt choice. For instance, if you are saving to provide for a long-term need like children's education or building a retirement kitty, then PPF which runs over a 15-year period and requires recurring investments could be more suitable. Conversely, if your prefer to make lump sum investments and have a shorter investment horizon, then NSC or tax-saving fixed deposits from banks may be more suited. Furthermore, it is worth noting that at present, some banks are offering a higher interest rate on their tax-saving fixed deposits as compared to the NSC. This only reinforces the need to make informed choices.
Insuranceis another casualty of stereotypical tax-planning. Premium paid on life insurance policies is eligible for tax sops. The trouble starts when tax benefits are given precedence over the 'insurance' aspect.
Not only can one end up buying the wrong insurance product, there's also the risk of having an insufficient insurance cover. While the tax sops on insurance are welcome, treat them as secondary benefits. It is important to buy insurance for the right reason i.e. the insurance cover and not treat it like just a tax-saving product.
The tax-planning exercise must be seen as a part of the overall investment strategy. Tax-saving investments can eventually play a significant part in helping you achieve your financial goals. Hence, the dire need to smarten up the tax-planning exercise.
