Friday, February 4, 2011

Avoid Last Minute Tax Planning

Came across this nice link in Economic times.

I found this article very good. In simple words one shouldn't wait for the last minute to invest or rather to plan your investments. Do it regularly and plan it will. Use the power of averaging and stagger your investments over a period of time. They help you not only from losses but also give you great returns. Systematic planning is the best way to invest, unless you are full time into this investments.

Here's the article mentioned above in the link

Aamir Humayun looks forward to holidays because they help him unwind and let him spend time with his children. But the public holiday for Mahavir Jayanti in 2007 put the Delhi-based businessman in a quandary. It was 31 March and Humayun had not finished his tax planning. “All banks and post offices were closed. There was just no way I could save tax,” he says.

So his chartered accountant stepped to help. One call to an insurance agent and a few signatures later, Humayun’s tax planning for the year was done. He and his wife had been sold two unit-linked insurance plans with an annual premium of Rs 1 lakh. “I was told that I would have to invest only for three years and that my investment would grow to about Rs 48 lakh in 20 years,” says Humayun.

The agent, who was incidentally the chartered accountant’s wife, conveniently glossed over the fact that these were only projections and based on the ridiculous assumption that stock markets would rise 18-20% every year in the next two decades. When the markets crashed in 2008, the value of Humayun’s investment plummeted. He has paid premiums for four years and the fund value is barely in the green. “Now these insurance premiums have become millstones around my neck,” he says in disgust.

The only cold comfort for Humayun, if at all, is that he is not alone. Millions of taxpayers across the country compress their entire year’s tax planning into one month. For salaried taxpayers, the tax-saving season kicks off when they get a note from the accounts division on how much they need to invest. With it comes the warning: give proof of investments or get ready for a hefty tax deduction at source (TDS). “That’s the time when undisciplined investors start running around like headless chicken,” says a financial planner.

In the rush to invest before the deadline, taxpayers often make fundamental investing mistakes, which they rue for years to come. Gurgaon-based software professional Ashwin Arora knows the perils of just-in-time tax planning. Three years ago, he was working with a large global consulting firm that gave him less than two weeks to show proof of his investments. “My company asked for proof by the end of the calendar year and I had only my provident fund contribution to show,” he says. So, Arora promptly invested Rs 33,000 in three tax-planning mutual funds at one go. This was just a few days before the markets went into a tailspin in 2008. “The three funds are good performers but my investments are still in the red,” he says glumly. Small investors should not put large amounts as a lump sum in equities. It’s best to stagger the investment in monthly SIPs. 

More importantly, experts say tax planning should be a part of the individual’s overall financial plan. In other words, the investment choices should not be governed by the potential returns they offer but by their ability to fit into the asset allocation of the individual. “One should choose the option depending on one’s risk appetite and asset allocation,” says Pankaaj Maalde, a financial planner working with Mumbai-based Sykes & Ray Financial Planners. Invest in the Public Provident Fund (PPF) if you need long-term debt in your portfolio. Go for NSCs, fixed deposits and infrastructure bonds if you want medium-term debt. Buy ELSS funds if you want equity exposure. And take an insurance policy if you require life cover. 


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