Financial Planning

Topics: Investment, Taxation, Tax, Progressive tax / Pages: 23 (5649 words) / Published: Jan 10th, 2013
How to save tax in 2013: Your guide to planning

The most important rule of tax planning is that it is no different from financial planning. The Section 80C offers a wide range of options, each suited to a different need. Choose an option that fits into your overall financial plan, not because it offers good returns or your brother-in-law is selling it.

It is easier to identify the best option if you do not leave tax planning for the dying days of the financial year. You get a rough idea of how much you need to save at the beginning of the fiscal year.

Allocate your Rs 1 lakh limit across different Sec 80C options as dictated by your financial goals, following the same principles of asset allocation that apply to other investments.

Taxpayers can take a leaf out of Ramakant Mishra's book. The Belapur-based PSU bank employee wants to save for the education and marriage of his two daughters.

Given that these goals are a good 15-20 years away, he has been advised to invest in diversified equity funds. So, he has started a monthly SIP of Rs 3,000 in an ELSS fund, thus aligning his tax-saving investment with a long-term financial goal. "I chose to put money in the ELSS fund because it serves a twin objective in my financial plan," says Mishra.

ARE YOU READY FOR RISK?

That’s good thinking on Mishra’s part, but allow us to slip in a caveat here. ELSS funds invest in stocks and carry the same risk as any other equity fund. In fact, the risk is greater because you can't touch the investment before the three-year lock-in period.

Besides, it is best to invest in equity mutual funds in monthly driblets. Investing a large amount at one go may have been a good strategy when the Nifty was floundering at 2,700 levels and a PE of 11-12 in early 2009. But it would be hara-kiri to do so when the index has crossed the 6,000 mark and is trading a tad above its long-term average PE of 18

For small investors, this is the time to be fearful rather than greedy.

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