Tax planning is one of the most important aspects of personal finance. People often fail to look at tax planning objectively and straight away start with making investments related to tax saving. Most of the people try and mix tax planning and investment planning which are totally different and are made with varying objective.Insurance for long has been the front runner whenever investments regarding tax savings are considered. Life Insurance is not an investment option but a financial tool that helps you protect the family from any unforeseen eventualities. Buying excessive insurance defying its motto leads to holding unnecessary products. Savings under section 80C can be broadly classified as: Investment based (PF, PPF, EPF, NSC, NPS, Fixed deposit, ELSS) and Non investment based (principal repayment of home loan, tuition fee). Before making investments related to tax saving it is always important that the individuals must analyze their risk appetite and determine the percentage of debt and equity exposure they are comfortable with. Then they can match these percentages of debt and equity buy investing in the available tax saving investments.Since the risk appetite, liquidity needs and current portfolio of every individual are different, making investments based on just returns is not advisable.
Tax planning age wise:
This is generally the starting phase of career for most of the professionals. HRA should It is the right time to start saving for the future. The investments made during this phase should have a long term investment horizon. Starting to save and investing for retirement will give an edge if started at early age because of power of compounding. Investing in a mix of ELSS and Pension related schemes like EPF, NPS or EPF is a good option for professionals of this age group.
By doing so, they ensure that they plan for their retirement from an early age. It also provides the advantage of providing equity exposure to their retirement fund.
It is also advisable for the professionals of this age group to get required life insurance cover and health insurance cover. They can take the advantage of low premium rates if they start during this age. Avoid falling in the trap of endowment plans and ULIPs.
31 – 36
During this phase, most of the professionals can generally take advantage of avenues of tax savings other than investments. Contribution to PF by self and employer, required life insurance cover for self and family will form the major portion of 80C. Tuition fee of the children can also be claimed under the same section.
The average age of an Indian home buyer is 30. Most of the professionals in this age group can take advantage of tax savings related to a home loan. They can claim the principal repayment under section 80C and interest repayment under section 24B. For couples who are both liable to pay tax, it is advisable to take the home loan on a joint account.
It is also advisable to take required health insurance cover for self and family which would account for section 80D.
For professionals who can still make investments under 80C, before making any tax related investments they have to chalk out the goals they want to achieve and their respective timelines. Then based on their risk appetite and time horizon, they can invest in relevant tax saving investments. Avoid over doing tax saving investments.
36 – 45
Non investment related tax savings will play a major role in tax planning even during this phase. Principal repayment on existing home loan, employer and self contribution for PF, tuition fee of children, life insurance cover for self and family account for more than 1 lakh under section 80C for most of the professionals in this age group. So, most of them need not even make any investments for tax saving. In case they have an option to invest in 80C they can opt for investments pertaining to retirement. They can even claim the interest repayment of home loan under section 24B and health insurance premium being paid for self and family under section 80D.
This is also time for the professionals to undo the past mistakes made regarding tax savings. They have to assess all their existing tax saving investments and assess the pros and cons of holding them. It is also important that they avoid over doing tax saving investments. They have to assess all their expenditures and identify the expenses which are eligible for tax savings. This gives them a fair bit of idea whether they have to make investments or not.
46 – 60
This is generally the peak earnings phase of the professionals. Most of them try to pay off their existing debts and channelize their income towards savings for retirement. The same factors of home loan, tuition fee and PF account for majority of the tax savings. Most of the professionals do not opt for health insurance other than the one provided by their organizations. But getting a health insurance at age 60, after retirement is an uphill task. Most of the service providers have a cut off age of 60. So if you need not get a health insurance by now, get one. This can be claimed under section 80D.
The cut off age for opening a PPF account is also 60. If they do not have a PPF account by now, it is advisable to start one 60 years is the cut off for opening a PPF account. In case they have to make investments, they can choose any of the debt products related to retirement. Avoid buying excessive insurance or tax saving investments.
Capital protection should be the motto of the investments being made after retirement. All investments should be in debt. Retired employees looking for timely pay outs (monthly or quarterly) can consider investing in Senior Citizen Saving Schemes (SCSS). Since SCSS is backed by government, it provides high security for your capital which is essential for post retirement investments.
Written By Arthayantra