Tax deduction always hurts that too when the amount getting deducted is big.
So how do we reduce tax in long term or what kind of planning is required to reduce this burden?
Every year we are advised by our financial planner or advisors to invest in something that reduces our tax liability. It may be NSC, PPF, ULIP, etc.
Tax planning: A perspective
these tax saving investments are at times taken based on advice from colleagues or friends or financial advisors at large. Generally investors go for the scheme if it helps to reduce tax liability.
Apart from reducing tax, you should ask some questions.
What is the risk involved?
Are the returns from the scheme taxable?
Do I need to make investment in this scheme every year or just a one-time investment?
Does it support my financial goals?
Apart from tax saving investments is there anything to be considered in tax planning?
Tax planning in your financial planning:
Tax planning is also a part of your overall financial planning. When tax planning is done in your financial planning, it plans tax in a much broader perspective.
1. Tax saving investments:
This is the most obvious one. In order to reduce the tax liability, where you need to invest will be answered here. This deals with the investments under section 80C. Also it covers section 80D and the housing loan interest for tax saving purpose.
When these tax saving investments are made or selected based on your financial plan, these schemes will not only save your tax, they will also help you achieve your life financial goals like children’s future need or retirement plan.
Also, the tax saving investment scheme selected may change every year depending on the requirement of the financial plan.
If in a particular year, you have more exposure in equity, then the financial planner may recommend you to invest in PPF. In another year, if you have less exposure in equity, he may ask you to invest in mutual fund ELSS.
Tax planning will be different from year to year and person to person.
2. Salary structure:
Nowadays, employers provide some flexibility in structuring the salary of their employees. Sixty-seventy per cent of the salary will be given under the predetermined heads. For the remaining part of the salary, employers will give you some flexibility. That is, you will be allowed to claim that portion of your salary under allowance A or allowance B or allowance C, or as a combination of allowances A, B and C.
If your employers provide such flexibility then share the details with your financial planner. He will be able to tell you in what way you structure your salary that is going to be beneficial in reducing your overall tax burden.
3. Superannuation scheme:
Your employer may introduce some superannuation scheme with some special tax benefits in which you contribute an X amount and your employer will also contribute an equivalent amount.
When your employer introduces any such schemes, if you share the details with your financial planner, he will study the scheme and let you know whether it is a good scheme or not.
If it is a good scheme, then is it suitable to you or not? If it is suitable for you then how much you can contribute towards the scheme?
Many employees are clueless what to do when the employer introduces such schemes. If you opt to do your tax plan in sync with your financial plan then all these problems will be solved.
When employers allot some of their shares to their employees by way of employee stock option plan (ESOP), they generally announce some packages. That is, the employee will get X number of shares free and Y number of shares can be allotted at a subsidized rate.
Also, there will be some lock-in period for these shares. After the lock-in period the shares can be transferred to your demat account or the employers can sell those shares and give you the money.
Again, if you share these ESOP package details to your financial planner, he will be able to tell you in what way you claim your ESOP then that is going to be tax advantageous to you. Also, he will check in what way these ESOP will help you achieve your life financial goals.
From the financial planning point of view, tax planning has got much broader perspective. Generally tax planning will be done as a part of financial planning.
Tax planning is covered under financial planning. But tax filing is not covered in financial planning. However, financial planner may do that tax filing service also with an additional charge.
#Financial Goals and how to achieve them?
Each one of us has dreams which we want to achieve. Unless we commit and persevere to achieve our dreams, they don’t occur in reality. Whether personal or financial, setting goals helps us in defining what we want and taking small steps towards achieving the same.
Setting specific, financially viable goals and managing personal finances to achieve the goals forms the very core of financial planning.
Here are four easy steps on how to go about planning and achieving your financial goals:
Define your goal
Defining your goal is the first step towards achieving it. Goal setting involves setting objectivity to the investments we make. Some common goals we set are: buying a car, buying a home, education/marriage of children and a happy retirement.
All goals can be classified in two categories: one-time events and recurring events. For example, events like child birth, marriage, buying a car/home can be classified as one-time events as these require one-time bulk cash. Whereas, goals such as education of children or retirement can be classified as recurring events as they need a recurring cash flow for years.
Identifying financially viable goals and classifying them is the first step towards goal planning.
Set the time frame for your goal
After defining goals, we need to define the timeline for each goal. Timelines along with our risk appetite would help in deciding on appropriate financial planning. Goals which need to be realised in less than a year can be termed as immediate-term goals whereas goals which need to be realised in a time frame of 1 – 3 years can be termed as short-term goals. Medium term goals have a time frame of 3 – 7 years while goals with a time frame of over 7 years can be termed as long-term goals. Defining goals according to the time line can help you develop a roadmap with important milestones to be achieved on the way.
Assess the financial corpus needed for your goal
It is a common financial planning practice to assume the corpus needed for your goal in today’s value and adjust the value to inflation, also known as time value of money. After considering the rate of inflation, we should focus on the time required to achieve a goal and the type of goal to determine the total corpus needed. For example, consider a one-time goal, such as down payment for a home, which you want to achieve in 3 years from now. To calculate the corpus needed to achieve this goal in 3 years, you should consider the corpus needed for the down payment at current value and adjust it to the inflation rate, which is simply the rate at which things become expensive.
In the case of recurring goals, individual cash flows are adjusted to the rate of inflation. For example, consider the goal of saving corpus for your child’s higher education where you would need to pay a fee of Rs. 1 lakh every year for 4 years. Let us assume that the child will be starting higher education in 5 years from now. Here, the first year fee is adjusted to inflation considering a time frame of 5 years, and the fee for second year is adjusted to inflation considering a time frame of 6 years and so on.
Prioritise your goal
All our goals are not of similar value or importance. Despite fair planning, it is still possible that we may not be able to achieve all our goals. When it comes to trading off among various goals, we should give high priority to the ones which are of a higher importance than the rest, for example- child education, home etc. Similarly, some goals can be given low priority, buying an expensive car or planning an international holiday, for example. The idea here is to increase the likelihood of achieving important goals. Prioritising is done by ranking all our goals based on the order of their importance.