Five mistakes you should not repeat this new financial year.
Like many others, Hiren Lakhani also resolves to minimise his tax liability each year. Yet, he made the basic mistake of not exhausting his Section 80C and 80CCF limit of Rs 1.2 lakh in the last financial year. This 38-year old is a homeopathic doctor by qualification and a teacher by profession. He runs coaching classes with his father and falls under the highest tax bracket.
“Ideally, tax-saving should not be looked at in isolation. It should be linked to a financial goal,” says Suresh Sadagopan, a certified financial planner. For instance, if the goal is retirement, one can look at instruments such as the Public Provident Fund. Similarly, for those in the lower tax brackets, it may not always be necessary to exhaust the entire limit. They should first purchase an adequate health insurance for themselves and their family (exemption of Rs 15,000 under Section 80D). Next, they can proceed to exhausting Section 80C, followed by the 80CCF limits.
| MISTAKE 1: Not exhausting the Section 80C or 80CCF limit ADVICE: If the Employee Provident Fund limit is not used entirely, the leftover amount is added to income and taxed. For the highest bracket, include debt through the Public Provident Fund and start a systematic investment plan (SIP) in equity-linked saving scheme. Infrastructure bonds can be used for additional benefits. MISTAKE 2: Investing in unit-linked insurance plans and endowment plans ADVICE: Don’t mix insurance with investment. Insurance components in hisher portfolio should be health insurance and term plan, if heshe has dependants. MISTAKE 3: No tax planning through the year, scrambled last minute ADVICE: Start from today, so that there is no last minute scrambling. Also, one may not have a lump sum towards the year-end. MISTAKE 4: Redeemed investments to buy a house, exhausted liquid holdings ADVICE: If the annual interest repayment was more than '1.5 lakh, it doesn’t help to take a big loan for tax benefits. Calculating the likely equated monthly instalments on the part-payment and invest that money in equity mutual funds via SIP. MISTAKE 5: Did not utilise additional tax benefits through family members ADVICE: One can pay salaries to his wife and father, provided they help in the family business. This will be an expense for the business and can be deducted from the overall income, lowering the tax liability. |
Since Lakhani doesn’t have any specific financial goal, Sadagopan suggests he put the Rs 1 lakh amount in equity-linked savings schemes in the next financial year. He can earn double-digit returns over the three-year lock-in before the tax benefit to these schemes goes away with the Direct Taxes Code next year.
However, choosing only the instrument is not sufficient. Lakhani must invest via a systematic investment plan (SIP) over a year to average out the market volatility. This is important, as most people do not invest in a disciplined manner through the year and scramble towards the end. Often, they end up as victims of mis-selling or in some cases, don’t have adequate liquidity to invest a lump sum to exhaust the limit.
Like 28-year-old Ameya Shete, who over the past three years has purchased several insurance plans. And, in his own words, “My biggest mistake is that I have no consolidated record of my tax-saving investments. So, I regularly pay my premiums, but I am unaware of any duplication in my portfolio.” The result: he is paying much more than Rs 1 lakh as premiums each year.
Financial planner Pankaj Mathpal advises not to invest through investment products. “At his age, he definitely needs a health insurance. He can buy a term plan if he has dependents,” adds Mathpal.
Adding to his woes, he liquidated all his stock holdings last year to part-pay for his new house. At present, he doesn’t have any investment and is paying equated monthly instalments (EMIs) towards his loan of Rs 30,000. Shete needs to concentrate on re-building his portfolio from a long-term perspective. Bangalore-based certified financial planner Amil Rego suggests, “Shete can rebuild his portfolio by calculating the likely EMI he would have paid on the part-payment and invest that money in equity mutual funds via SIP.”
Besides using the various sections of the Income Tax Act to plan taxes, you can consider distributing your income among your family members to lower your overall income. “For instance, Lakhani owns a family business. If his family members, father or wife, help him with work, he can pay them salaries. Salaries paid to the family members will be treated as a business expense and Lakhani can claim it as a deduction,” says certified financial planner Malhar Majumdar.
Further, Lakhani can keep their salaries below the basic exemption limits applicable plus additional deduction limit of Section 80C and 80CCF. This way, Lakhani’s wife can earn up to Rs 3.1 lakh annually and his father Rs 3.6 lakh, completely tax-free income (assuming investments are made in the tax-free instruments appropriately).
And, about the non-earning members of the family, you can create investments in their name such as opening a five-year fixed deposit in Lakhani’s mother’s name. This way, any return earned on the same, otherwise taxable can become tax-free.
