As we enter in the last quarter of the financial year, tax-planning will assume center stage with a lot of ‘tax talk’ cornering media attention.
While prudent tax planning is a year-long activity, with the Christmas setting in soon we dish out a few ways to save tax wisely and bring in some early holiday cheer.
Simple ways to save tax:
Many individuals treat tax-planning and investing as separate exercises. Naturally, the ‘investing’ exercise gets a fair degree of attention and the investor makes it a point to make a lot of enquiries and raise pertinent queries before investing.
The ‘tax-planning’ activity however gets minimal attention. Investors simply invest in the latest insurance or ULIP or mutual fund scheme regardless of whether it’s suitable to their investment profile and objectives.
This is not the ideal way to engage in tax-planning. Investing to save tax and investing for other objectives like retirement planning, for instance, have the same fundamentals. So any investment – be it towards retirement planning or tax planning must be evaluated on how it can add to your savings and whether it suits your risk profile. The tax angle is crucial but it comes in the picture only after you have established all the other angles related to risk and investment objectives.
Once you have a fix on the risk and returns profile of an investment, tax-saving comes as a natural consequence.
Although there is no ‘one-size fits all strategy’ for tax-saving, this is broadly how various investor categories must go about the activity.
Typically younger investors can take on more risk since they have time on their side. They have fairly higher levels of risk appetites.
Such investors can consider equity-linked investments like tax-saving mutual funds – also known as equity-linked saving schemes (ELSS). Younger investors have an investment horizon of at least 10 years, which is an ideal time frame for equity investments. Fixed income options like tax-saving fixed deposits and public provident fund (PPF) can also be considered in moderate allocations.
This is an ideal age for investors to start planning for retirement. Effectively the tax-saving mutual fund can serve a dual purpose – investing for retirement as also tax-planning.
Middle-aged investors – in the 40 years+ age bracket do not have the same level of risk appetite as younger investors. So tax-saving FDs and PPF to a larger extent and tax-saving equity funds in limited allocations, are the mainstays of the tax-dedicated portfolio.
Older investors – over 50 years old have limited risk appetite particularly since they are heading into retirement and would not want to deal with stock market volatility at this stage. So fixed deposits and PPF must occupy a lion’s share of the tax-saving portfolio. Tax-saving equity funds can be considered in lower allocations - subject to risk appetite.
Remember that all these are broad tax-saving recommendations and at best serve as guidelines. Hence before the holiday season gets over, making sure you get your finances back in order to so that your new year is indeed a happy one.
Merry Christmas and Happy Investing!