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4Ps
TAX PLANNING? for 2009-10 Naah... It’s wealth creation!!!
4Ps
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 Noted chartered accountant G. D. Singla explains, “Early tax planning provides ample time to analyse the options, assess the risk and returns and above all, it allows greater bargaining power to the tax payers to an extent that in many cases, one need not even pay advance taxes!” If that sounded Hebrew, perish the painful thought, as this cover story is made with an atypical contrarian objective of putting penny to the foolish and pound to the wise. Revisiting the books, and at the cost of sounding back to the basics, we put forth the well respected S. Kumar of the leading chartered accounting firm Simon & Cailand, who explains, “In simple terms, tax planning means availing of the benefits of deductions, rebates, exemptions in taxation law to reduce the total tax burden of an assessee.” He further explains that tax planning does not merely imply putting money in some designated options; if envisaged properly it can be a great source of prudent wealth planning that could help to focus primarily on post tax yield taking into consideration the basic parameters of safety and liquidity. Ergo, if the philosophical Zeusian change has been implemented by thyself, you could test new waters with your second move.
And that is to make tax planning a monthly feature rather than an end of the year quarter feature beginning in January and calling it quits by March. The ‘instead’ approach sprains and strains one’s cash flow many a time; some even are forced to borrow to make these investments, certainly a double whack. Add to this the fact that the individuals suffer losses on account of compounding benefits (in case the investment avenue happens to be public provident Fund) and the rupee cost averaging (in case of investment in ELSS, Equity Linked Service Scheme). Change in government’s economic policies, closing of several attractive investment schemes, et al may further add on to the loss. Tax planning early on in the year can actually take care of all such losses. As the tax payer in such a case tends to spread his tax saving investments over 12 months rather than concentrating in three months.
And then we come to the third move. Apart from ‘when’, a tax payer also needs to know ‘where’ to invest. It is of prime importance that he is aware of the investment avenues so that he does not lose out on any opportunity. A host of investment avenues exist in the market: Mutual Funds, National Saving Certificates (NSC), Public Provident Fund (PPF), Monthly Income Scheme (MIS), Employee Provident Fund (EPF), Life Insurance, Systematic Investment Plan (SIP), Unit Linked Insurance Plan (ULIP), et al. The choice of these instruments rests on the individuals need for liquidity. The stock market benders could favour Equity Linked Saving Schemes, or ELSS, as the dividend income earned from units invested in ELSS are exempted from IT Act; and moreover, on redemption of the units the capital gain income is also tax exempted. And the otherwise bent could favour PPF, as the interest paid on it is on a compounded basis and tax free on withdrawal. Also, any amount lying in the PPF a/c cannot be attached by a court of law, thus providing maximum social security.
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 However, Samant Jha of ICICI Direct suggests the dividend option as compared to growth option for the fact that dividend option enables investors to capture any growth in the scheme during the lock-in period and it also takes care of investor’s liquidity needs which are otherwise constrained by the growth option. In view of the renewed interest in tax saving funds, tax advisors offer a five point strategy – assessment of the risk profile, comparison of returns over a three year period, comparison based on other parameters (Standard Deviation, Sharpe Ratio), evaluation of the fund house and selection of dividend option in comparison to growth option. Nevertheless, the investment necessarily needs to be a mixed portfolio comprising NSC, PPF, and LIC, et al. The divergence with regard to choice of instruments is evident, but amidst the divergence, there is a point of convergence that takes care of all needs.
However, while deciding where to invest, a tax payer’s life also needs to be considered. For example depending on need, decisions taken by a salaried person should be different from that of a self-employed person. The salaried class must see to it that they fully avail of the deductions and exemptions under Section 80C and Section 10. Depending on the CTC (cost to company), employees should go for the reimbursement option available for conveyance, food coupons, mobile bills, et al. These are exempted from tax and thus decrease the total tax liability on the part of the employee. Further, his advice to tax payers is that they should not go for a single investment avenue and park all their money; rather, they should opt for a mixed portfolio and further spread the taxable income among various members of the family, taking full advantage of tax exemptions available under any law. They must also go in for medical insurance, which, apart from adding to the cause of their family’s health, allows a tax exemption of up to Rs.15,000 under section 80D. Rajesh Kumar (Vipul Barnwal & Associates) offers his candid selection of portfolio, “Insurance, NSC and PPF are a must to avail the section 80C exemptions completely.”
As far as the self employed people are concerned, they have no employer who will take care of their regimented investment plans through PPF, group life insurance benefits and so on. Hence, they have to be in control of their own destiny and thus, there is greater need for tax planning as well as financial planning for this category. Rajesh (Vipul Barnwal & Co) suggests, “They should make a monthly or quarterly savings target and should redirect their savings in hybrid investment products.” Looking at the current market trend and performance of various funds available, Mandal advises them to put some money in risk free and low risk instruments as well.
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