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Every year, the last date for filing income tax (I-T) returns is July 31. That is, four months into the new financial year. Usually, the last two weeks witness increased activity among taxpayers to meet the deadline to file returns.
Interestingly, the heightened activity during these weeks is not much different from what most salaried people do during the last three months of the financial year — January, February and March, what is referred to as the JFM months in market parlance. They rush to save some taxes by investing in investment products that qualify as tax savings options under the I-T act. And this rush act often leads to mistakes that are carried with them for years. In addition, such investments also fail to optimise returns for the investors. Thus, one rush job can not only make it expensive for you as an investor, but it can also fail to give you returns, which otherwise you would have got if you had planned a bit early in the year.
In the current financial year, you still have nearly nine months left to plan for your tax savings, and with time on your side, do some research that can give you better returns in the long haul. Also, your plan to save taxes over the months till March can turn out to be less of a stress on your finances compared to when you bunch it up during the JFM months.
At the basic level, an investor should have equity, insurance and PPF (public provident fund) in his/her portfolio for a balanced investment plan that also allows tax savings.
Mutual Fund SIP
If you are one of those investors who has the ability to take some risks and invest in equity schemes of mutual funds that also allow you to save taxes, like the equity linked savings schemes (ELSS) and pension plans (only two of the latter variety are available in the market), you can go for monthly systematic investment plans (SIPs). As you invest small sums through the months, you will have at the end of the year some large sum invested in instruments that qualify for yearly tax savings.
In addition to the less-burdensome process of investing only small sums, SIPs also come with several other advantages (see our last two weekly editions of Swatantra). For beginners, SIPs inculcate investment discipline, are less of a headache, a low-cost option to you as an investor, and give the advantage of rupee-cost averaging — that is, buying in all types of market conditions whether it is a rising, sliding or a flat market.
Compared to that, suppose you rush during the JFM period, chances are you may end up with an investment that may not even be suitable to your risk profile and also your long-term investment goals.
Insurance
There are enough examples of an investor being sold an insurance product that, while helping the investor save tax for the year, in the long haul it turns out to be a mistake and a costly one at that.
In the process, the insurance advisor or the agent makes some good money from the fat commission he/she gets.
As an investor, you should be careful not to fall into such a trap. So, if you are buying an insurance, do proper due diligence before you buy that. Now even if you have bought one and then found out that the policy is not the best one for you, you can enjoy the 15-day free-look period from the day of buying the policy and cancel it. Irda, the insurance regulator, allows every policy holder this 15-day period to go through the terms and conditions of the policy, understand their implications and then reverse their decision to buy the policy if it is found to be unsuitable. During this free-look period, as a policy holder you can also switch to another policy or alter some of the features in the policy that are changeable.
As an investor, however, make no mistake that most of you would need insurance, but make sure to buy the best suitable policy or policies according to your requirement. And if you have more than one policy, spread out the premiums over the year rather than bunching it up in a short span of time.
Public provident fund - PPF
Another popular long-term tax planning investment product is the public provident fund, popularly known as PPF. The 15-year scheme, which is also extendable by blocks of five years, gives a post-tax annual return of 8-9% and excellent long-term returns. The scheme is also guaranteed by the government.
The PPF scheme also allows you to spread out your investments through the year. You can deposit up to Rs 1 lakh per annum in your PPF account. You can make the deposit in lump sum, or in convenient monthly instalments. However, you cannot make more than 12 instalments in a year, or two instalments in a month, subject to the overall cap. So, in effect, you don't need to put an equal sum of money into your PPF account every month, but you can choose how much to put and when to put, given the overall 12 instalment cap. For example, in a particular month when you have to pay your insurance policy and, after taking into account your SIP outgoes, you are left with Rs 3,000. You can invest that in the PPF account. Then again, if the next month you don't have any insurance premium to pay, you can deposit some extra amount in your PPF.
As an investor, you have these very common investment options with which you can plan and spread your tax savings needs. It's good if you can manage it on your own. Else, if you don't feel confident, you should seek professional help from a financial advisor, a financial planner or a tax advisor for a small fee. Whatever the case, do your tax planning early in the year, and don't wait for the calendar to change to 2013.
Make it a continuous exercise: Consider this as part of your and your family's long-term financial planning
Get a financial wrapper: Have a single financial advisor or planner to help you with all your investments, rather than different persons selling different products to you
Involve family: Your tax and financial planning is for your family as a whole. Involve your family members, it enhances financial bonding
Take responsibility: It is your responsibility, and not that of your financial planner. Get fully involved, ask more questions and agree with your planner to disagree, but finally settle for the best solution
Common Mistakes
- Low-risk investors going in for high-risk ones
- Buying a new policy each year when there's no need
- Investing in a low-return policy that gives the agent a fat commission
- Choosing multiple products with total investments amounting to what's more than required
- Entering a market-linked product at a high price just because everyone else is
- Missing out on investments that offer higher post-tax returns
Happy Investing!!
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