Wrongly attributed to Mark Twain, Benjamin Franklin, in a letter to Jean-Baptiste Leroy in 1789, which was re-printed in The Works of Benjamin Franklin, stated: "'In this world nothing can be said to be certain, except death and taxes."
No one likes paying taxes, but it's not like we have a choice. Having said that, it would be downright silly if we did not avail of all the tax breaks offered by the government.
Despite being aware of this aspect of our lives, it's interesting, and rather tragic, to see people hobble from one tax season to another.
A young man recently informed me that he is amazed to see some professionals take a holistic view of the portfolio. With a little bit of prodding, he explained where he was coming from. This 33-year old has been earning decently for a few years and is in the highest tax bracket. He does not have a financial adviser and is “too lazy” to think of investments from the “portfolio perspective”. Rather, he just views it as tax saving. So he does his ritual between January and March, but he views it as an annual exercise.
This is the single biggest mistake investor makes when it comes to saving tax.
They make ad-hoc decisions at the fag end of the financial year, and the result is often a portfolio bloated with insurance policies or ULIPs.
Tax planning decisions should never be conducted in isolation. Instead, they should be driven by your overall financial goals and integrated with your total financial plan.
In a crazy dash to meet their Section 80C requirement, most investors opt for unit linked insurance plans, or ULIPs, and endowment plans, and often end up with products that are duplicated in their portfolio or do not suit their need. Life insurance should never be bought with the intention of saving tax. Tax saving is just one of the benefits that come along with it. The main benefit is the provision of finances in the case of death of the policy holder.
Approach tax saving with a holistic mindset. For instance, if your portfolio is heavily tilted towards fixed income instruments, it would not be wise to opt for an investment in National Savings Certificate, or NSC. Instead, think of an equity linked savings scheme, or ELSS.
A friend works for the government and all his investments are in his provident fund and fixed deposits of banks and post office. He has also invested in a house. It was worth noting that he had zero exposure to equity. In his case, a smart tax-saving investment would be ELSS. But I am not generalising here. If someone only invested in equity funds and stocks, then logically, the investments he should focus on are the fixed return ones that offer a tax break.
To go back to the point being made, you can make sensible decisions only if you take an integrated view of your investments and goals. If you are looking at tucking away money for over a decade, then definitely the Public Provident Fund, or PPF, would score. If you need the money in a few years, then the NSC would be a more suitable option.
If you want your money to work towards one goal, which is creating wealth, ensure that you approach it in this fashion.
This week we shall be focusing on tax planning. Stay tuned.
