Financial planning: A few year-end tips

Yes, you need to do a whole lot of work to ensure that your finances are in place.

With the financial year coming to an end, it's time to do that all important review. And there are a lot of things that need to be taken into consideration.

The financial review will include investing in tax-saving instruments under different sections, tax implications of equity and debt instruments and even rejigging the portfolio to keep the asset allocation in line with pre-defined goals.

No wonder, taxpayers scramble to their financial planners and chartered accounts to make sure that their numbers are in place.

Here are some of the important areas that need attention

Financial planning completion

Every individual needs to look at their goals and then decide on investments to match the goals. During March, the first thing on the mind of taxpayers is the completion of investments under Section 80C.

There is a total limit of Rs 100,000 that is available for various specified investments, including contribution to provident fund, national savings certificates, equity-linked savings schemes, repayment of capital of housing loan, senior citizens' savings schemes, etc.

It is imperative that a taxpayer takes full advantage of this limit. A lot of people end up forgetting that contributions to the employee provident fund are a part of Section 80C because they are directly deducted from the salary. If this is considered in the calculations, then it reduces the last-minute pressure for making such investments.

Another common point is that, in many cases, individuals have spent fees on education for their children, but forget to add this in their tax calculations.

Regular investments made

There are various investments that need regular contributions in order for benefits to accrue to the investor. The end of the financial year is a time when the actual position can be reviewed and any missing gaps can immediately be plugged.

For example, the public provident fund requires a minimum contribution each year to keep the account alive. The amount here is Rs 500.  It is important to remember that, even if a person does not intend to invest in the PPF during a particular year, they still need to deposit the Rs 500 to keep the account alive.

Insurance policies

There are insurance policies that are taken out by individuals and these need regular premium payments. In some cases, the investor forgets to pay the premium. Missing out on this area can lead to a situation where the necessary cover might not be available any longer.

Sometimes, a lot of policies bunch up in the month of March, making it difficult to keep track of them. However, this is the time to do a careful review of the entire situation and ensure that all the policies are being serviced properly.

Many people often miss out on the benefit provided by health insurance policies as they just look at life insurance covers. But there is a separate section (80D) whereby one can get benefits for buying medical insurance policies for themselves and their senior citizen parents.

Debt investment

When it comes to debt investments, there has to be a review to see the kind of exposure that you have. This is a time when the investor can make use of the double indexation benefit to ensure that a large part of their returns over the next year become tax-free at their hands.

Even investments in fixed deposits need to be monitored -- whether they have matured or haven't been renewed. This is vital, because there might be some deposits that have not been claimed.

In fact, some of them could be earning lower rates than what is prevailing in the market. Keeping a track will also ensure one is aware if the returns are exceeding the limit where there will be a tax deduction at source. In that case, one has to make sure that the investments are broken down, or made in-parts to ensure lower taxation.

Equity investments

There is also some work that has to be done with respect to equities. This happens because a total review of the portfolio will show whether the investor is missing out on some tax benefits.

For instance, there is a zero tax rate for long-term capital gains, while short-term capital gains has a 15 per cent rate. Looking at the situation during the year, the investor might have made some small short-term capital gains.

If there are some holdings that will result in a short-term loss, but which are not expected to do well. The investor needs to take a  decision to sell these off and book their losses. The losses can be set off against the gains to reduce the tax burden.

Similarly, if there are investments that are not likely to recover from their falls and they are not yet long-term in nature, the investor could decide to sell them before the year ends and have some losses in their books.

Long-term capital loss is worthless for the investor and they cannot set this off against any other gain. So such a review and action might be necessary for them to plan their actions according to their exact position.