Tax Planning Easy Steps for 2014

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Tax Planning Steps

Are you feeling relaxed now that your tax filing is done and you don't have to look into your taxes for another year? Think again. You are already in the second quarter of the financial year 2013-14; if you haven't yet started your tax planning, or at least if not with a sense of a direction, this is no time to be complacent. While most of us wait till the last minute, some don't plan at all. This year let's do things a little differently. Read on to find out how you can conveniently conduct the tax planning exercise in five easy steps.

Step 1: Think of tax planning as a financial planning exercise

First, it is important to change one's perspective towards tax planning. Most of us rarely think about tax planning from an investment point of view. Ask yourself, have you ever really looked into the nature or type of the investment that you made for tax savings in detail? Does it fit well with your overall financial goals? More often than not, the answer is likely to be--No.

This is mainly because we tend to not invest sufficient time and thought in the tax planning exercise. To further worsen matters, we tend to procrastinate and wait until the last minute. Subsequently, investment decisions are made in a rush.

On the other hand, if we invest time and effort in this exercise, it can go a long way in helping us achieve our financial goals. After all tax planning investments are no different from conventional investments. Hence, it is imperative that we have an in-depth understanding of all investment avenues available which offer tax benefits. Subsequently, you can choose the ones that are suited for you and can help you achieve your goals as well. A systematic tax planning exercise will ensure disciplined and well informed investment decisions at your end.

Step 2: Start early

Do you think that starting the tax planning exercise early amounts to worrying about your taxes from now on and that it will give you nothing but prolonged stress? Nothing could be farther from the truth. On the contrary, an early start to exercise can help alleviate the stress altogether. Investors usually fail to give due attention to their tax planning until the last moment when the financial year is at its fag end. Tax planning should be considered as an ongoing process rather than a financial year-end activity.

Step 3: Calculate your tax liability

While you work on your tax planning exercise, it is very important for you to know what your tax liabilities are and accordingly work towards it. Admittedly, for individuals who are engaged in business activities, computing the tax liability at the start of the financial year might be easier said than done. However, individuals who have a relatively fixed income like salaried employees, understanding and computing the tax liability need not be a difficult task. Compute your tax liability well in advance so that you will know how much to invest to save tax. If you do not know how to compute your tax liability then it is prudent to engage the services of a tax expert.

Step 4: Do your risk profiling

What is my risk tolerance level? The answer to this question is derived from your age, income and financial goals/requirements. Investing without understanding one's risk appetite and the risk associated with a given asset class or investment avenue can be a recipe for disaster. Therefore before you go on to pick a tax saving investment vehicle for yourself, you must ask this question as this in turn will help you select an apt investment option depending on your risk appetite.

If you are a risk-averse investor avenues such as Public Provident Fund (PPF) or National Savings Certificate (NSC) might be more apt for you. Conversely, for an investor who doesn't mind taking on risk in the quest for returns, equity linked savings schemes (ELSS) offered by mutual funds might be more suitable.

Step 5: Choose the right avenues

It is important for any investor to not blindly invest for the purpose of tax saving but also look into the investment avenues thoroughly and check whether they fit in their investment strategy and match their risk appetite. For example an investor who has to meet a financial commitment in the next three years, entirely investing in PPF would not be advisable as it has a lock in of 15 years. Hence choosing the right avenue becomes the most crucial step in your entire tax planning exercise. There are at present quite a number of investment options available for the purpose of tax saving. Some of them are listed below.

Public Provident Fund (PPF): This is among the most popular and safest tax saving vehicle. Investments in PPF offer tax-free 8% annual returns with no risk, making it a good fit in most portfolios.

National Savings Certificate (NSC): Another popular small saving scheme is the NSC. Investments in NSC earn a taxable return of 8% per annum compounded on a half-yearly basis.

Equity Linked Savings Scheme (ELSS): As the name goes this is an equity linked tax saving product apt for investors who are willing to take an exposure to equity markets. Investments in ELSS are subject to a lock-in period of three years from the date of investment.

ULIP: Expanded as Unit Linked Insurance Plan and issued by insurance companies, this product offers investors the benefit of investing in both equity and debt markets.

Insurance: Many insurance plans such as term, endowment, health do offer tax benefits however you must also remember that you should ideally buy insurance for the purpose of protection, whether it is your life or health, and not just to save taxes.

New Pension Scheme (NPS): This is the most recent entrant among instruments eligible for benefits under Section 80C. It can be a good option for retirement planning with tax savings. However, do keep in mind that withdrawals under the NPS attract tax under the EET (exempt-exempt-taxable) system, which means that withdrawals are taxed as normal income unlike PPF which falls under the EEE regime where withdrawals are exempt from taxes.

 

 

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