By PersonalFN
A Prudent exercise of income tax planning also extends to appropriate investment planning, which also takes into account your ideal asset allocation by considering the under-mentioned factors.
Hence after you have utilised the tax provisions within each head / source of income for effective reduction in Gross Total Income, you must also consider the following parameters as these will enable you to optimally reduce your tax liability.
• Age..!
Your age & the tenure of your investment play a vital role in your asset allocation. The younger you are more risk you can take and vice a versa. Hence, for prudent tax planning too, if you are young, you should allocate more towards market linked tax saving instruments like as Equity Linked Saving Schemes (ELSS), Unit Linked Insurance Plans (ULIPs) and National Pension Scheme (NPS), as at a young age the willingness to take risk is high.
One may also consider taking a home loan when you are young as; number of years of repayment is more along with your willingness to take risk being high.
Also a noteworthy point is the earlier you start with your investments, the greater is the tenure you get while investing in an investment avenue, which enables one to make more aggressive investments and create wealth over the long-term to meet your financial goals.
Let’s understand this much better with the help of an illustration.
An early bird gets a bigger pie..!
| Particulars | Suresh | Mahesh | Sandesh |
| Present age (years) | 25 | 30 | 35 |
| Retirement age (years) | 60 | 60 | 60 |
| Investment tenure (years) | 35 | 30 | 25 |
| Monthly investment (Rs.) | 7,000 | 7,000 | 7,000 |
| Returns per annum (%) | 10% | 10% | 10% |
| Sum accumulated (Rs.) | 2,65,76,466 | 1,58,23,415 | 92,87,834 |
The above table reveals that, Suresh starts at age 25, and invests Rs 7,000 per month in an ELSS scheme through SIPs (Systematic Investment Plans) until retirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Mahesh starts at age 30, a mere 5 years after Suresh, and invests the same amount in ELLSS scheme (through SIPs) until retirement (also at age 60). His corpus builds up to approximately Rs 1.58 crore, note the difference between the 2 corpuses here.
And lastly, we have Sandesh, the late bloomer of the lot. He begins investing at age 35, the same amount monthly in an ELSS Scheme as Suresh and Mahesh, and invests up to his retirement (also at age 60). His corpus is, in comparison, a meagre Rs 92 lakh.
One can also consider donating an affordable amount towards a noble cause, as doing so will make you eligible for a tax benefit (under section 80G of the Income Tax Act).
For some of you young people, pursuing higher education may be a priority. But there may be a case you do not have enough corpus (funds) garnered by you.
However, you need not worry, as there are manyl banks willing to offer higher education loan; & if you avail the same, the interest paid by you on such loan taken will be eligible for tax benefit (under section 80 E of the Income Tax Act – which is discussed ahead in this guide).
• Income..!
Similarly, if your income is high, your willingness to take risk is high. This thus can work in your favour, as you have sufficient annual Gross Total Income, which allows you to park more money towards market-linked tax saving investment instruments, for generating higher returns and creating a good corpus for your financial goal(s).
Also, on account of the higher GTI your eligibility to take a home loan also increases, which can also help you to optimally reduce your tax liability.
Yes, one may say if I have a high income, then why I need a housing loan. I can straight away go ahead & buy!
Sure, you can do so but, the Income Tax Act provides you the tax benefit for repayment of principal amount along with the interest of loan taken, which you will miss.
Also given that you are financially strong, you can also consider donating some of your money towards a noble cause, which can also enable you to enjoy a income tax benefit (under section 80G of the Income Tax Act).
Similarly, if your income is not high enough (i.e. it is low), and you do not want to put your money to risk; you can invest in tax saving instruments which provide you assured returns.
These instruments can be Public Provident Fund (PPF), National Savings Certificates (NSCs), 5 Year Bank Fixed Deposits, 5 Year Post Office Time Deposits and Senior Citizen Savings Scheme (provided you are a senior citizen).
• Financial goals..!
The financial goals which one sets in life, also influences the tax planning exercise. So, say for example your goal is retiring from work 5 years from now, then your income tax saving investment portfolio will be also less skewed towards market linked tax saving instruments, as you are quite near to your goal and your regular income will stop.
Likewise if you are many years away from the financial goal, you should ideally allocate maximum allocation to market linked tax saving instruments & less towards those instruments (tax saving) which provide you assured returns.
• Risk Appetite..!
Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while doing your income tax planning exercise. So, if your willingness to take risk is high (aggressive), you can skew your tax saving investment portfolio more towards the market-linked instruments. Similarly, if your willingness to take risk is relatively low (conservative), your tax saving investment portfolio can be skewed towards instruments which offer you assured returns, and if you are a moderate risk taker you can take a mix of 60:40 into market-linked tax saving instruments and assured return income tax saving instruments respectively.
Yes, we reckon the fact that prudent tax planning exercise can be a time consuming and complex. But please note the fact that it’s an annual activity which every tax payer has to go through - and if you start early and plan properly, the task becomes easier.
Remember, procrastination will only ensure that you invest at the last moment and not in line with the parameters discussed above. If you are hard pressed for time, consider hiring a competent tax consultant along with an investment advisor.
Src: www.PersonalFN.com
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