Tax planning tips to help you save money

A tax plan is not just to save taxes, but should also assist in achieving other financial goals such as buying a home, a car, children's education, retirement, etc

Most people handle financial planning and tax planning in isolation. However, a good financial plan will ideally include a tax plan that will help both from a tax savings perspective as well as generate decent returns on the capital invested. So a tax plan is not just to save taxes, but should also assist in achieving other financial goals such as buying a home, a car, children's education, retirement, etc.

There are several ways to plan for one's taxes while making a good financial plan. Here are a few illustrations:

Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.

Life insurance

If you are married and have kids, life insurance is something you must consider. The premium that you pay qualifies for tax deduction so long as the annual premium is at least 10 times the sum assured / the insurance cover.

Health insurance

Insuring against financial losses due to healthcare costs is perhaps one of the first things to be considered when one starts earning. Premiums paid towards a health insurance policy qualifies for a deduction of Rs 15,000 for an individual and Rs 20,000 for a senior citizen under section 80D (If one's dependent parents are below 60 years of age you get an extra deduction of Rs 15,000 and if they are older you get Rs 20,000). If your premium is less than Rs 15,000 you can claim a deduction of up to Rs 5,000 on account of preventive health check-up.

Employees' provident fund (EPF)

For a salaried individual, the entry to the world of section 80C investment products usually begins with the EPF. It is a very useful tool for long-term savings. While it is mandatory for employees having a basic salary of Rs 6,500 per month, it is a voluntary contribution to those earning above that limit. The EPF gives a return of 8.5 per cent per annum, and the contribution qualifies for a tax deduction under 80C up to Rs 1 lakh.

Public Provident Fund (PPF)

PPF's are another good method to invest for the long term and save tax, as they give a return of around 8.8 per cent, and one can avail a Rs 1 lakh deduction from investments into this under Section 80C. Maturity proceeds are tax-free as well.

National Pension System (NPS)

This is a long-term investment vehicle designed solely for retirement saving. It limits equity investment to 50 per cent making it more suitable for balanced or conservative investors. Being a retirement product, it has a lock-in till 60 years of age. Your contribution qualifies for a tax deduction up to Rs 1 lakh. On maturity, you can withdraw up to 60 per cent as lump sum and the remaining 40 per cent goes into buying an annuity, a pension product that pays you periodic income.

Equity-linked savings scheme (ELSS)

If you are planning for the long term and can stomach short-term volatility that stock markets bring to your portfolio, equity investments are the ideal investment choice. Investments in ELSS offers the prospects of better returns as it is based on stock market returns, and it also offers a deduction of up to Rs 1 lakh under section 80C. You can either invest lump sum or through systematic investment plans (SIPs).

In order to encourage first-time investors, the government has notified a new scheme called the Rajiv Gandhi Equity Savings Scheme (RGESS) for first time equity investors. This comes under a separate deduction limit of Rs 25,000 under section 80CCG.

Housing loan

Owning a home is a key element of financial planning and second or third home can often be a good investment (depending on 'diversification'). Individuals intending to buy a house should consider opting for a home loan. Interest payments of up to Rs 150,000 per annum are eligible for deduction under Section 24. In cases where the home loan is for a substantial sum, it is not uncommon for the interest and principal repayment to exceed the stated limit. To ensure that the tax benefit is optimally utilised, an individual can consider opting for a joint loan with the spouse or parent or sibling. This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised.

Fixed deposits

There are notified FDs of tenor of five-year or more that also give you the 80C deduction. The interest is taxable though. So it works if you are in the lower tax bracket or need an assured income in the short term.

Chalk out your goals and then pick your investment products carefully. And in the next financial year don't wait till the end of the year to start tax planning.

Summary:

• A good financial plan includes a sound tax plan
• It is advisable to understand one's risk appetite and investment horizon prior to selecting a tax saving instrument
• One should always opt for a judicious mix of different kind of investments to benefit from better returns, while saving tax
• Each instrument has positives and negatives, study these carefully before locking in your money in any one instrument