Invest right to save your income tax
You have to carefully weigh the merits and demerits of each tax
saving option available
This is that time of the year when most of the people are
looking up to the festive season. It is a good time to talk about the tax
planning which we can do for the current financial year so that we can be
equipped to maximize on our tax saving potential. So, how do you go about
saving on your income tax? Read on to know more!
Educate yourself
The first and foremost step is to educate oneself on the following:
- The tax bracket under which one falls without any tax planning and with tax planning
- The various tax planning options available
- One’s saving capacity
- One’s monthly expenses
- Understand how much should be saved and invested per month to maximise on tax planning
- Planning on the expenses for the upcoming financial year
- Monitoring expenses and investments
- Seeking professional help, in case of need
Education holds the key, as it equips you with the requisite knowledge to leverage the various options available for an individual to save on income tax.
Evaluate your options
Once you have educated yourself about the afore mentioned points, it is time to evaluate all the tax saving options that you have. You have to carefully weigh the merits and demerits of each tax saving option available. Furthermore, you have to surely evaluate your risk ability as it will help you choose on the tax saving options wisely.
Strategize and invest
Once you are aware of all the options on investments that you have, it is time to come up with a few investment strategies which you can adopt as per your situation. Some of the important facets of your investment strategies should be:
It should be a mix of debt and equity tax saving instruments
Insurance has to prominently feature to cover your liabilities
Your strategy should be sustainable in the long run: there is no point trying to allocate 75% of your earnings to savings and plan based on that
Should leverage the lock-in periods in a manner so as to coincide their maturity with your long terms needs
Your strategy should give you enough room to pivot and change if the investments are not giving adequate returns
Illustrations on a few strategies:
Case A:30 year old single with no housing loan and no other liabilities
• Income and Tax Bracket: Rs.6,50,000 (Rs.54,000 per month approx)
• Monthly Expense: Rs.25,000
• Targeted Monthly Savings: Rs.18,000 (Rs.2,16,000 annual)
• Tax Planning Strategy A (Moderate Risk Appetite):
Basic Term Insurance Cover with a premium of around Rs.6000 (Sum assured between Rs.5-8 Lakhs INR)
Medical Cover for self and parents (this premium can be anywhere between Rs.25000- Rs.50000 depending on parent’s health)
Mutual Fund ELSS in SIP mode for about Rs.60,000 (Rs.5k/month)
Rest in tax savings oriented bank FDs and EPF/VPF
• Tax Planning Strategy B (High Risk Appetite):
ELSS for Rs.150,000 (SIP Rs.12,500)
NPS invest Rs.50,000
Basic medical cover worth Rs.16,000
• Taxable Income after planning: Rs.4,34,000
As can be seen, immaterial of the strategy adopted, this person uses her/his savings to move from the 20% income slab bracket to 10% income slab bracket.
Case B:44 year old married with housing loan and 1 kid
• Income and Tax Bracket: Rs.15,50,000 (Rs.129,000 per month approx)
• Monthly Expense: Rs.75,000
• Targeted Monthly Savings: Rs.30,000 (Rs.3,60,000 annual)
• Tax Planning Strategy A (Moderate Risk Appetite):
Term Loan to cover home loan, kid’s education/marriage, and provide a basic retirement lump sum (Rs.30,000)
Medical Cover worth Rs.50,000
Retirement Insurance Plans Rs.100,000
NPS Rs.50,000
Rest in Savings account or bank FDs which give tax benefits
• Tax Planning Strategy B (High Risk Appetite):
Term Loan to cover home loan, kid’s education/marriage, and provide a basic retirement lump sum (Rs.30,000)
Medical Cover worth Rs.50,000
At least Rs.100,000 and upwards in ELSS or equity oriented ULIPs
Rs.50,000 in NPS
Rest in ULIP pension plans
• Taxable Income after planning: In between the range of Rs.11,00,000 – Rs.12,50,000 depending on the interest paid on the home loan
In the above illustration it should be noted that the tax planning has been done for more than the amounts eligible for tax exemptions. So, a person can replace ELSS with normal equity schemes from mutual funds, in case they feel they can gain more as they already have planned for their taxes.
Also in the CASE B illustration, the person will save at least Rs.60,00 as their taxable income after planning.
Choose your strategies wisely and invest to both increase your savings as well as save on taxes! A double treat!
Educate yourself
The first and foremost step is to educate oneself on the following:
- The tax bracket under which one falls without any tax planning and with tax planning
- The various tax planning options available
- One’s saving capacity
- One’s monthly expenses
- Understand how much should be saved and invested per month to maximise on tax planning
- Planning on the expenses for the upcoming financial year
- Monitoring expenses and investments
- Seeking professional help, in case of need
Education holds the key, as it equips you with the requisite knowledge to leverage the various options available for an individual to save on income tax.
Evaluate your options
Once you have educated yourself about the afore mentioned points, it is time to evaluate all the tax saving options that you have. You have to carefully weigh the merits and demerits of each tax saving option available. Furthermore, you have to surely evaluate your risk ability as it will help you choose on the tax saving options wisely.
Strategize and invest
Once you are aware of all the options on investments that you have, it is time to come up with a few investment strategies which you can adopt as per your situation. Some of the important facets of your investment strategies should be:
It should be a mix of debt and equity tax saving instruments
Insurance has to prominently feature to cover your liabilities
Your strategy should be sustainable in the long run: there is no point trying to allocate 75% of your earnings to savings and plan based on that
Should leverage the lock-in periods in a manner so as to coincide their maturity with your long terms needs
Your strategy should give you enough room to pivot and change if the investments are not giving adequate returns
Illustrations on a few strategies:
Case A:30 year old single with no housing loan and no other liabilities
• Income and Tax Bracket: Rs.6,50,000 (Rs.54,000 per month approx)
• Monthly Expense: Rs.25,000
• Targeted Monthly Savings: Rs.18,000 (Rs.2,16,000 annual)
• Tax Planning Strategy A (Moderate Risk Appetite):
Basic Term Insurance Cover with a premium of around Rs.6000 (Sum assured between Rs.5-8 Lakhs INR)
Medical Cover for self and parents (this premium can be anywhere between Rs.25000- Rs.50000 depending on parent’s health)
Mutual Fund ELSS in SIP mode for about Rs.60,000 (Rs.5k/month)
Rest in tax savings oriented bank FDs and EPF/VPF
• Tax Planning Strategy B (High Risk Appetite):
ELSS for Rs.150,000 (SIP Rs.12,500)
NPS invest Rs.50,000
Basic medical cover worth Rs.16,000
• Taxable Income after planning: Rs.4,34,000
As can be seen, immaterial of the strategy adopted, this person uses her/his savings to move from the 20% income slab bracket to 10% income slab bracket.
Case B:44 year old married with housing loan and 1 kid
• Income and Tax Bracket: Rs.15,50,000 (Rs.129,000 per month approx)
• Monthly Expense: Rs.75,000
• Targeted Monthly Savings: Rs.30,000 (Rs.3,60,000 annual)
• Tax Planning Strategy A (Moderate Risk Appetite):
Term Loan to cover home loan, kid’s education/marriage, and provide a basic retirement lump sum (Rs.30,000)
Medical Cover worth Rs.50,000
Retirement Insurance Plans Rs.100,000
NPS Rs.50,000
Rest in Savings account or bank FDs which give tax benefits
• Tax Planning Strategy B (High Risk Appetite):
Term Loan to cover home loan, kid’s education/marriage, and provide a basic retirement lump sum (Rs.30,000)
Medical Cover worth Rs.50,000
At least Rs.100,000 and upwards in ELSS or equity oriented ULIPs
Rs.50,000 in NPS
Rest in ULIP pension plans
• Taxable Income after planning: In between the range of Rs.11,00,000 – Rs.12,50,000 depending on the interest paid on the home loan
In the above illustration it should be noted that the tax planning has been done for more than the amounts eligible for tax exemptions. So, a person can replace ELSS with normal equity schemes from mutual funds, in case they feel they can gain more as they already have planned for their taxes.
Also in the CASE B illustration, the person will save at least Rs.60,00 as their taxable income after planning.
Choose your strategies wisely and invest to both increase your savings as well as save on taxes! A double treat!
Happy Investing
Source:Moneycontrol.com
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