While there are tax-saving options galore for the conservative investor – think bonds and post-office schemes, the risk-taking investor has limited options. That is why he must make the most of what’s on the table like tax-saving mutual funds, for instance.

Tax-saving funds, also known as equity-linked saving scheme (ELSS), offer the ideal platform for tax planning.

But first, it helps to understand tax planning a little better.

What is tax planning

Tax-planning is about making investments (or contributions in technical parlance) to reduce tax outgo. Tax laws prescribe certain tax-saving investments / contributions for claiming tax benefits. Money invested in the tax-saving investments is deducted from the income while computing tax liability. Consequently, tax outgo is reduced, leaving more disposable income in the hands of individuals.

Some of the key tax-saving avenues include:

• Tax-saving funds – the only mutual fund investment in the tax-planning ambit
• Tax-saving fixed deposits
• Public Provident Fund (PPF)
• Post office schemes like National Savings Certificate (NSC)
• Life insurance
• Repayment of principal amount on home loan

 Tax planning must be with a plan

 Ironical as it sounds, tax planning is often done with little planning. Individuals give limited time and thought to it. It’s usually a rush-rush affair at the eleventh hour. The adhocism robs the individual of significant gains that he could have registered had he planned well in advance.

 A tax plan must be prepared in the backdrop of two important questions:

• What are my goals
• How much risk can I take

A tax-saving plan for Ajinkya

Let’s take Ajinkya, a 28-year old professional, married with a kid. 

Ajinkya needs to save money for:

• A House – about 7 years later
• Child’s Education
• Retirement

Ajinkya is willing to take on necessary risk in his pursuit of the goals, as they are mid to long term in nature, which gives him enough time to accumulate wealth through the equity route.

Tax-saving equity funds are ideal for Ajinkya since they bring two important benefits to the table:

1. Tax benefit under Section 80C
2. Wealth creation on the back of stockmarket growth

The logical step for Ajinkya is to marry tax-planning with goal achievement.

This means the equity money earmarked for his goals must be routed through tax-saving mutual funds. This way he is invested in the right instrument and collects tax benefits to boot.

Let’s assume Ajinkya has Rs 1 lakh available for investment under Section 80C - the initial Rs 50,000 is invested in a combination of EPF and life insurance. This is how Ajinkya can go about investing in his tax plan:

1. Rs 30,000 in tax-saving funds towards child’s education
2. Rs 50,000 in tax-saving funds towards retirement planning (as the EPF will not be adequate for retirement)
3. Rs 20,000 in tax-saving funds towards the down payment on the house

 Notice how Ajinkya achieves three objectives in one stroke:

1. His well envisaged tax-saving plan eliminates eleventh hour rush
2. He is slowly but surely on the path to achieving his goals

• The tax benefit he collects is an added bonus - remember goals are always more important than the tax benefit

 Of course, the tax-saving investments alone will not be enough for Ajinkya’s goals. This is just the portion on which he can avail of tax benefits. He will have to invest more in line with how much he wants to accumulate towards his child’s education, retirement planning and down payment on his house. He can best calculate the numbers with help from his financial planner.

 Takeaways

1. Tax planning is serious business, it must start earlier in the year, based on a plan
2. The plan must consider the middle to long term goals of the individual and not obsess over tax benefits

For risk-taking investors, tax-saving mutual funds are favourable for the two-fold benefit of wealth creation and tax savings.   

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