Tax Planning is NOT separate from financial planning

By Larissa Fernand | Jan 10, 2023

If you want your money to work towards creating wealth, ensure that your tax planning decisions are NEVER conducted 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.

  • Asset Allocation

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.

For example, a colleague used to shun any fixed return investment because, with retirement at least three decades away, he preferred stocks and equity mutual funds. So he exhausted his Section 80C with ELSS and contributions to the Employee Provident Fund (EPF).

Personally, I max the entire amount (Rs 1,50,000) in Public Provident Fund (PPF) every single year, despite my EPF contribution. (The tax benefit under Section 80C is restricted to Rs 1.5 lakh even if I exceed the amount). I am slightly risk averse and a long-term fixed-return investment with assured safety fits nicely in my portfolio. I do not ignore equity and my monthly SIPs into equity funds continues.

  • Sub-Asset Allocation

Within the respective asset allocation, you will have to fine tune. For instance, if the equity portion of your portfolio is heavily skewed towards large-cap stocks and funds, then ensure that the ELSS you opt for has a tilt towards mid-cap stocks.

  • Time Frame

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.

Please Read: Do not make these 5 tax-planning mistakes
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