Investors should sync tax savings with goals and cash flow needs

Even ELSS, being an equity fund, should be purchased with minimum seven-year horizon

If you are one of those who have done a last-minute running around to complete your tax investments before March 31, you will do well to keep the momentum going in the new financial year. Starting your tax planning for 2024-2025 right at the start of the financial year will help you organise your finances better and maximise the benefits from tax-saving investments.

“Starting your tax planning early prevents last-minute stress that arises once employers ask for proof of tax-saving investment. It also ensures that your financial goals are aligned with your tax-saving investments,” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.

Arvind A Rao, founder, Arvind Rao and Associates, adds: “You have better clarity on tax obligations and better control over cash flows when the tax liability is spread throughout the year. You can also optimise investment opportunities.”

 

Assess your tax-planning needs

Begin by figuring out your tax liability for the year. If you are employed, use the average growth rate of the past years to estimate your salary for the current year. “Project last year’s income to this year — fixed and variable. Also evaluate which of your tax commitments will happen by default, for example, school fee payments, Employees’ Provident Fund (EPF) contributions, and so on,” says Dhawan.

Existing obligations that call for recurring payments include life insurance premium, health insurance premium and systematic investment plans (SIPs) in Equity Linked Savings Schemes (ELSS). If you have a home loan outstanding, ask the lender for bifurcation of the expected home loan principal and interest repayment for the financial year. Salaried persons should figure out expected EPF contributions.

“Evaluate whether the old or the new tax regime works better and accordingly decide on tax-saving investments,” says Rao.

 

Align with financial goals

Ad hoc investments at the last minute may help save some tax but often do not serve financial goals. For example, a traditional life insurance policy bought in a hurry to reduce tax may offer neither adequate sum assured nor decent returns. “Aligning financial goals with tax planning allows you to do more with your money – protect your financial goals and save tax,” says Santosh Joseph, founder, Germinate Investor Services.

If you have a spouse, parents and kids who are financially dependent on you, go for a term cover with an adequate sum assured.

 

Plethora of investment options

Contributions to EPF, Public Provident Fund (PPF), life insurance premiums, National Savings Certificate, ELSS, Sukanya Samriddhi Yojana, home loan principal repayment, and child’s tuition fee qualify for tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-Tax Act. Contributions up to Rs 50,000 to the National Pension System (NPS) qualify for deduction under Section 80CCD(1B). This is over and above the Rs 1.5 lakh deduction under Section 80CCD(1). Health insurance premium gets a deduction up to Rs 25,000 per year for self, spouse, children, and parents. In the case of senior citizens, this deduction stands at Rs 50,000.

“Ideally young investors may find ELSS relevant due to its shorter lock-in and possible higher inflation-adjusted return over longer horizons. Younger investors may also consider NPS to get the benefit of compounding and save towards retirement in a tax-deferred manner,” says Dhawan.

“Senior citizens who don’t have any active income must also ensure that their cash flows are tax efficient,” adds Joseph.

 

Match the duration

Avoid any mismatch between investments and goals. For example, if you plan to invest in a unit-linked insurance plan (Ulip) that calls for a multi-year commitment, or take a home loan, then figure out if these options are suitable for your goals and fit into your cash flow needs. “For long-term goals, NPS, retirement-oriented mutual funds, PPF, EPF, and ELSS may be considered, while for medium-term goals, tax planning fixed deposits could be considered. Everyone should go for a health cover and avail of Section 80D deduction,” says Dhawan.

Rao has a slightly different take. “No short-term goals should be aligned to tax-saving instruments as the minimum lock-in for these investments is three years (for ELSS). Even ELSS, being an equity instrument, should be considered for long-term goals only,” he says.