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How to attain your financial goals via tax planning

March 25, 2010 12:55 IST
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One afternoon, Mr A was busy completing some work when a new email notification appeared on his screen.

He checked to find that it was a notification from his company seeking details on his tax plan for the year that had had to be submitted by the month-end. Mr A let out a sigh, for yet again he had done nothing on tax planning and the time left was little for any kind of planning for him to do.

Many of us will be able to relate to the situation Mr. A faced. We tend to postpone till we are forced to act and then what happens? We look for an easy way out.

So what would Mr A typically do? He would find out how much he needs to invest in order to avail the maximum benefit under Section 80C and then follow investment patterns of last year or invest in an instrument that will ensure he receives documents of proof in time.

Mr A's objective is to save taxes. He very well may have achieved it. But the moot question is, 'Were the investments done in an instrument that would help him to attain his financial goals?'

What is the disadvantage of waiting till the last moment?

Incorrect investment decisions: Haste makes waste. The investment may not be a waste per se from a monetary perspective, but it is certainly a waste of an opportunity to move in the direction of attaining your financial goals. That's because you may be investing in something that you don't really need.

Investments should be aligned to financial goals. For example, if you are at a stage in life where you can take risks, investing in National Savings Certificate, Pubic Provident Fund or bank fixed deposits will not serve your purpose.

Omission of a possible medium to save tax: Apart from Section 80 C, several other sections of the Income Tax Act provide you with an opportunity to save tax. They include home loan principal and interest payments, children's school and college fees, premium on life and health insurance, among others.

On account of lack of time, you may choose to ignore some of these, especially premium on health and life insurance because the tax advantage is not very significant. You need to view this from the perspective that you have not given it a due consideration and that it is a part of your financial goals.

Also, if you have moved income brackets, it might make sense for you to consider other larger investments. For instance, last year investing in a house was out of budget, but this on account of a pay hike you could well consider it given the tax benefit on home loan principal and interest payments.

Lower returns on some investments: Many a times, investing over a period of time gives you the benefit of rupee cost averaging. If you have decided to make investments in ELSS (equity-linked savings schemes), then investing through a Systematic Investment Plan (SIP) will certainly be advantageous as the average cost tends to be lower. Your overall returns get impacted.

Stress on Cash Flow: Investing regularly and spreading the investment over a year helps to have better control on cash flow. Investing at the very last moment may result in a cash crunch like situation.

Tax incentives are given to encourage savings/ investments. Savings form part of your overall financial plan which in effect means tax planning is a subset of financial planning.

Your financial plan will set objectives for you based on your aspirations, your lifestyle, your age group, size of family, etc.

The question you need to ask yourself is, 'Did you adhere to your financial plan while investing in an instrument for tax saving purposes?' Well if your answer to that is 'yes', then you're moving in the direction of attaining your financial goals.

If not, it's time for you to take corrective action. The damage may have been done for the past year but the forthcoming is an opportunity for you to plan well. Remember, procrastination is the thief of time.

So if you postpone it now, this year will be no different from the last one.

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