A Financial To-Do List

By Larissa Fernand |  05-04-21 | 

Don’t ever ignore the opportunity to (legally) save on taxes just because it is a bit of a bother. The less tax you pay, the more disposable income in your hands to either spend or invest. And that should be motivation enough to get rid of your nonchalant attitude towards tax planning.

Mistake 1: View tax planning as a year-end activity.

Individuals hobble from one tax season to another. With no cohesive thought process, the ad-hoc decisions made at the end of the financial year defeat the very purpose of a smart portfolio. As long as individuals view tax planning as an annual occurrence at the start of the calendar year, their portfolio will bear testimony to their missteps.

In a crazy dash to meet their Section 80C requirement, they end up settling for unit linked insurance plans (ULIPs), and endowment plans. They often end up with products that are duplicated in their portfolio or do not suit their need. A portfolio bloated with insurance policies does not ensure that you are aptly covered, neither does it put you rightly on the path to wealth creation.

Since the financial year is from April 1 to March 31, you need to start now.

Mistake 2: View tax planning as separate from overall financial planning.

Never conduct tax planning decisions in isolation. Every single decision must be made keeping in mind the overall financial plan. Every investment must complement the other, not compete with it. To draw an analogy, the 64 black-and-white squares on a chessboard complement each other and give structure to the layout. Each occupies a different position and serves a purpose. A chess board must have both.

Depending on a host of factors, you will have to arrive at your own equity and debt allocation. You then work within that framework.

If your portfolio is heavily tilted towards fixed income instruments, it would not be wise to opt for an investment in National Savings Certificate (NSC). Instead, think of an equity linked savings scheme (ELSS). On the other hand, if you are only invested in equity funds and stocks, then you should focus on fixed return investments that offer a tax break.

Also, the time frame of your goals matter. 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.

Most importantly, 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.

Avoid these two mistakes. Start now. Take an integrated view of your investments and goals. Both these moves will put you on the right path to wealth creation.

Read more about PPF and ELSS here.

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ninan joseph
Apr 10 2021 08:03 PM
 Not an expert but in my view, the maximum deductions that a tax payer can get is 150,000 + 50,000.
I would use this benefit for the following.
- LIC policy premium
- Mediclaim premium
The rest blindly invest in NPS. According to me, this is the best scheme available for retail investors who are not too savvy on stock markets. Open an NPS account and keep contributing on a monthly basis to this. No need for Demat account or anything. This is PFRDA managed and your contribution is allocated i.e 75% or 50% into Equity, 25% into Gilts, and 25% into bonds. You cannot get a better asset allocation strategy than this product. The commission is non-existant if I can say so. The max tax benefit you get is 2 lacks.

My personal NPS value fell by mere 0.50% during March 2020 crisis. This was mainly due to asset allocation and being in the fund for long. I am told this is similar to retirement 401K account of USA (not sure if this is correct).

NPS is long-term, you cannot access the funds until 60 years. You get the benefit of compounding. No need to worry too much about pedigree of fund managers, AMC, Large cap, mid cap, small cap etc.
The funds are managed by well known amc such as SBI, Icici, Kotak, HDFC.
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