The Most Authentic Guide on Personal Finance and Investments

Words of Wisdom : "A budget tells us what we can't afford, but it doesn't keep us from buying it." ~ William Feather

Tax Planning at the Last Minute

2012 is almost over. We now have just 3 months for the FY 2012-13 to end. Hopefully, many of you would have completed your tax planning for the year and are feeling relieved. (Though, how prudently it has been done may be debatable). However, as usual, there would still be quite a few who are yet to begin this annual ritual.

Everyone loves to hate tax. But regrettably there is no escape from it. In fact, the more you delay, the more painful it gets. Investments that save you tax are long-term in nature — many times running into decades. As such a wrong choice is going to hurt you for many years.

Even if you make the right choice, the timing of your investment could make a big difference. Suppose you invest Rs.50,000 in PPF every year. If you make this investment at the end in March, you would get back Rs.13.57 lakhs after 15 years (assuming a return of 8% p.a.). But, if the same investment is done at the beginning of the year in April, you will end up with Rs.14.66 lakhs — a clear gain of more than a lakh of rupees. [And it is just a matter of ONE DAY i.e. April 1st instead of Mar 31st.]

Thus, it makes ample sense to begin tax planning in April itself and not wait till the end when the axe is about to fall. So this is the first lesson for the habitual late latifs — tax planning must happen in April itself.

Second, for the current year, don’t fall prey to attractive advertisements or the persuasive sales pitch of the agents. You can take the following course of action to not only save tax but also make a better investment. [In fact, it should always be other way round — you should identify investments that are suitable for your financial needs and then check whether you can also save some tax in the bargain.]

Section 80D 

Consider health insurance for your family (self, spouse and kids). The amount of premium paid is allowed as deduction up to a limit of Rs.15,000.

Consider health insurance for your parents. The amount of premium paid is allowed as deduction up to a limit of Rs.15,000 (or Rs.20,000 if they are senior citizens).

Section 80C / 80CCC 

The limit u/s 80C / 80CCC is Rs.1 lakh and variety of investment options are available.

You would already have (a) had your PF deducted by your employer, (b) paid home loan EMIs that would include some Principal portion, (c) paid the Tuition Fees for your kids and (d) paid insurance premiums for the policies bought in the past.

So now you have to invest for the balance remaining limit.

Of the various avenues available under Sec 80C, ONLY PPF, Equity Linked Saving Scheme, and “Term” insurance policy (remember no other insurance policy) are the best options. Therefore,

a)    Buy a term policy provided your present insurance cover is not adequate enough. Thus, you would appropriately and inexpensively (term policy will not cost you much) protect your family besides saving tax.
b)    Depending on your risk appetite and the amount deducted as PF, you can suitably invest the balance requirement in PPF and/or ELSS.

Howsoever heavy the inducements or pressures may be, preferably avoid other alternatives as they are not as efficient as the above-mentioned options.

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