Mix and match

Two heads are better than one. Teams tend to perform better than individuals and by the same logic, by aligning your financial goals with the available tax saving options, you are likely to benefit the most. For most of us, income tax is the first exposure to financial decision making even before one can start writing down financial goals. Although both these aspects of our personal finances could be treated independently, you will be much better off by combining the two.

  At 26, Mumbai-based Mohnish Panchal demonstrates the maturity of a veteran financial expert by matching his tax savings choice with his financial goals to make the most of the tax savings. “I am using the tax saving windows to meet my financial needs, which allows me to align the two effectively,” he says. The choice of financial instruments to save taxes is plenty, but to derive more than just tax savings you need to match their benefits with your financial goals.

Building a foundation

At the base of every financial plan rests the aspect of protection and risk mitigation. The two most important insurance policies that one should have are health insurance and life insurance, especially term plans. As premium payments towards life insurance qualify for tax deduction, one should first opt for adequate life insurance cover. The life insurance cover will take care of future financial needs of your dependents if you were not to wake up tomorrow.

 You should next go for an adequate health insurance plan so that you are geared to face the financial implications of healthcare risks that you are exposed to. The other tax saving instrument which the salaried can benefit from is the EPF or the NPS, depending on what is on offer for you. Both these products serve the purpose of saving for your retirement needs.

 “The NPS was the mandatory retirement saving for me, which I did not appreciate in the beginning. However, over time and with the additional tax benefits it attracts, I find it to be the best retirement savings option that I could have got into,” says Delhi-based Manu Agarwal. Several taxpayers are finding favour with opting for the NPS, which has a stringent long lockin period and ensures one is able to save towards retirement without having the flexibility and liquidity to exit at the slightest of provocation.

Early start

If you are in your 20s, you have many years ahead of you, which should automatically stop you from putting money in fixed return tax saving options like the NSC, 5-year bank deposits and even the PPF. Tax saving instruments like the NPS and ELSS which have equity exposure should be your first choice. The reason to opt for these over other fixed return instruments is two pronged—you gain from the long term equity exposure and also the power of compounding.

 “For first time investors, the equity linked savings scheme (ELSS) is a good choice to experience equity investments,” says Nimesh Shah, MD and CEO, ICICI Prudential AMC. According to him, ELSS, which comes with a three-year lock-in, offers an investor twin benefits of wealth creation and tax efficiency.

 Those with over 10-15 years left in the workforce, the NPS is an excellent product to invest in to save taxes and also build retirement corpus. The choice of funds that one can invest within the NPS further allows you to manage the investment risk and still have equity exposure which is the only asset class which in the long run beats inflation.

Special situations

Today, buying a house without taking a home loan is rare. Now, if you can borrow to buy a house and also use the repayment to gain tax benefits, it is a move which puts you in a much better financial situation that you could imagine. Says Adhil Shetty, CEO, Bank Bazaar: “You can claim deduction of up to Rs 2 lakh on your home loan interest if you or your family reside in the house property or if the property is vacant.” And, if you have rented out your property on which the loan is running, the entire interest on the home loan is allowed as a deduction.

 The rising cost of education can take a toll on your finances, which is where the Section 80C benefit comes to your rescue under which you can claim tax deduction towards the sum you pay towards tuition fee for up to two children. This is beneficial for those too who wish to pursue higher education.

 A loan to fund your higher studies is easily available these days and most students opt for this. To provide incentives to students to pursue higher education in India, the government offers tax benefits for education loan takers under Section 80E. With this deduction, an education loan not only funds your higher studies but also helps save tax as the interest paid on the education loan can be claimed as deduction under Section 80E.

 To make the most of tax savings, examine your tax liabilities and finances before selecting tax-saving instruments. The choice would largely depend on several factors like product lock-in, risks involved with the instrument and the returns they earn. To make the most of the options you need to fit the two to meet your overall financial goals.

shipra@outlookindia.com