Taxes – a most common term but least understood and rarely planned systematically. Majority of us either hand over the planning to our CAs or choose some conventional tax saving options. While over past couple of years, the scenario has been changing as awareness regarding various products like ELSS schemes (tax saving mutual funds) offered by mutual funds is increasing. We still see people choosing say Public Provident Fund or five year FDs over products like ELSS to save taxes.
Do we think it’s a bad decision? Not at all. All we are implying in this discussion is planning taxes is more than just setting aside Rs 1.5 lakh every year to reduce income tax burden. When, in effect, it could be a part of your financial planning which if done perfectly can earn you handsome returns in the long run. Investing Rs 1.5 lakh yearly for 10 years at the rate of 12% return will become about Rs 26 lakh; while at the rate of 7% return, it will become Rs 20 lakh. So choice of the product matters.
Life insurance and medical Insurance are the mandatory products that all of us must have which provide tax benefits as well. To claim remaining exemptions, you need to invest in other available options. After studying all the financial products that offer tax saving benefits, we divided career span of a salaried individual into three parts and put together optimum tax saving plan from an investment perspective. Let’s discuss them one by one.
Initial Stage – This is a phase wherein career has just started and you don’t have much responsibility like family or any long-term loans. Let’s assume you start your first job around 25 years of age and say you get married around 30, this is the time you are not likely to have any huge one-time expenses. You can start an SIP in any ELSS scheme which will provide you with income tax benefits under section 80c and have lock in of three years. This is the product with minimum lock in period in this space. We would suggest investing in an ELSS scheme which will also provide you with additional benefit like free life insurance. Many mutual funds are offering this facility, and with this you can earn triple benefits of tax saving, equity returns, free insurance.
Intermediate Stage – In this stage, you are building assets like a car, a house, buying gold and so on. You may also start a family. This is the age between 31–50. Now instead of doing SIP in ELSS schemes we suggest you distribute your investment during November-March period. This will help you in receiving lump sum at the end of three-year period. This would be ideal for planning your holidays, kids’ tuition fees or other expenses. Between this period, you should also put some of your tax investments in to PPF (Public Provident Fund). This will provide a downside protection to your portfolio. You may consider NPS (National Pension Schemes) for investments as well. This will ensure that you receive pension post retirement. Also, additionally Rs 50,000 investment (over and above Rs 1.5 lakh) is permitted in NPS.
Final Stage – This is a stage just before your retirement wherein your risk appetite is lower than before. At this stage you may have bigger expenses like children’s wedding or medical expenses, foreign tours etc. Here we suggest you to keep the investment in ELSS schemes and withdraw money from other avenues that are offering lesser return on investments. For additional exposure, we suggest you to invest in products like NPS, five-year FDs, post office deposit etc that have lower risk and more consistent returns.
This way, in the initial stage, your ROI (return on investment) roughly would be in the range of 11-13%. In the intermediate stage, your ROI would be in the range of 9-11% and in final stage your ROI would be in 8-10% range. In the above discussion we haven’t considered other things that offer tax benefits like education loan, housing loan, children’s tuition fees etc. While planning taxes you may want to consider your liabilities as well.