As we enter the final quarter of the financial year, tax planning will top the priority list. We have always maintained that prudent tax planning is a year-long activity and forms part of the core investment planning process.
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.
What is the ideal to engage in tax planning?
Investing to save tax and investing for other objectives like retirement planning, 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 into focus 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.
Younger Investors (up to 40 years of age)
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). They 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 (40 years-50 years)
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)
Invetsors in this category 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 PPFs 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).
These are broad tax-saving recommendations and at best serve as guidelines. For specifics, investors must consult their financial planners.
