Nirav Panchmatia's Blog

Death & Taxes !!!

Death & Taxes are the only two things that are certain in this world. And yet we fear them both.

While we do not have a solution for your fear of death, we can definitely help remove your fear of taxes. Read on—
A major time consuming activity for every Indian, tax planning gives sleepless nights if not done properly & especially if postponed till last minute. Adding to the misery is the complexity & dynamism of the Income Tax Act that changes every year and requires one to be in touch with the latest developments. Further, there are a few mis-conceptions in the minds of common man surrounding tax planning that add to the misery.

Tax planning myths

  • I invest only to save tax
  • I buy Insurance only because I need to save taxes
  • PPF / NSC are still the best tax planning instruments available
  • Unit Linked Insurance Plan’s (ULIPs) are good for tax planning & give great returns as well
  • Rs. 100,000 is the maximum I can invest to save taxes
  • Repayment of loans do not qualify for any tax deduction
  • Tax planning needs to be done only at the end of the year around Jan-March

The right approach Tax planning investments have to be planned in a way that it helps you create WEALTH and in the process help you reduce your tax liability. Further, your risk taking capacity & asset allocation should decide what tax planning instrument you choose. Last minute rush to buy insurance or investing in PPF disregarding your actual needs is not the right approach towards tax planning.
A good financial advisor can help you decide on the right tax planning instruments for you based on your financial goals.
Steps to tax planning First step in your tax planning exercise, if you have a home loan, is to figure out the principal & interest component of your home loan because the amount of principal that you repay in a financial year qualifies for Sec 80C deduction (subject to Rs. 100,000 limit). Also, interest paid in a financial year on your home loan qualifies for deduction under Sec 24 subject to Rs. 150,000 limit. If you are already repaying principal exceeding Rs. 1 lac in a financial year, there is no need to make further tax saving investment u/s 80C.
Next step is to figure out your existing commitments towards Insurance, Pension plans or other tax saving instruments like ELSS, PPF,NSC, Infrastructure bonds etc. Tution fees of 2 of your children is also eligible for deduction u/s 80C.
Insurance & tax planning If you have still not exhausted your limit under Sec 80C, then give preference to pure risk cover Term Plan, if you do not have one already or if you are insured but the cover is not enough. ULIP’s are not advisable as these are very expensive & do not offer enough liquidity or insurance cover. One should buy Life Insurance if you are not adequately covered & not for the sake of saving taxes because once you buy insurance, you have bound yourself to a commitment to pay a certain amount throughout the premium paying term.
Tax planning, your risk profile & asset allocation The balance, if any, should be invested in a way that allows you to achieve your financial goals & suits your risk profile. If you are an investor not willing to take risks & happy with 7 to 8% returns, then assured return schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) & tax-saving fixed deposits are the ones for you.
If you are aiming for higher returns & willing to take higher risks, then Equity Linked Savings Scheme (ELSS) is the best option for you. But remember that ELSS or tax saving mutual funds are market linked and you need to stay invested for at least 5+ years to get good returns (lock-in only for 3 years). Investment in ELSS done via Systematic Investment Plan (SIP) helps you distribute your tax burden over 12 months which is better than having to pay the entire amount in Jan-Mar.

Some Investments eligible U/s 80C of The Income Tax Act, 1961

Investment Options Returns Treatment of Income Liquidity
PPF/EPF 8% pa Tax free Withdrawals allowed after 6 years
NSC 8% pa Added to persons income for that year Matures in 6 years
Bank FDs (> 5 Years) 8 to 9% pa Added to persons income for that year Lock-in for 5 years
Pension Plans 7-8% pa Added to persons income for that year Payable on retirement
Insurance Premia (Endowments, Moneyback etc) 6-7% pa Tax free Payable on maturity
Insurance (ULIPs) 6 to 15% pa* Tax free At least 3 years
Tax Saving Mutual Funds (ELSS) 15% pa** Withdrawals and dividends both are tax free Lock-in for 3 years

* Returns are not assured and depends upon asset allocation ** Returns are not assured but market related although past 5 yrs have given a CAGR of > 15%.
Do not limit your tax planning to Rs. 1 Lac u/s 80C Sec 80D allows deduction up to Rs.15,000 yearly in case of premium paid towards medical insurance for self, spouse & dependent children. Additional deduction of Rs. 15,000 (Rs.20,000 in case of parents who are senior citizens) shall be allowed for mediclaim of parents. If you have availed an education loan, then entire interest paid on your loan is eligible for deduction u/s 80E upto eight years. Sec 80G allows deduction in respect of certain specified donations up to 50% of the donation amount (100% in some cases) subject to 10% of your gross total income.
To sum up One of the biggest mistakes that people make is that they invest to save tax. The right approach is to invest for achieving your financial goals keeping your risk taking capacity and asset allocation in mind and at the same time save tax. So choose your tax savings investments wisely. HAPPY INVESTING!!!
(Mr. Nirav Panchmatia is a Financial Planner practicing under his firm “AUM Financial Advisors”. He is a Chartered Accountant (CA) & MBA Finance from Narsee Monjee, Mumbai and has worked for the past 8 years in leading financial institutions like Citigroup (Investment Banking), ICICI (SR. Manager – Subsidiary Business) & IRIS (Analyst) etc.



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