Tax planning needs to be at the core of investment planning at each stage
Tax ‘planning’ is something that most people usually put away for the final quarter of the financial year. You must have read and heard from multiple sources that this is not the way to do it. Tax planning and investment planning considered two different domains, ought to be subsets of each other.
A sustainable approach
When you plan investments and other financial instruments, you consider multiple factors such as your savings, your long-term and short-term financial requirements, upcoming, and appraisals in income tax-saving tax planning a separate endeavor, then? Each investment need not be a tax saver, but each tax-saving investment need not purely be that. That is essentially why investment planning needs to be done at the beginning of the year, with tax planning as one of the considerations.
The age factor
Risk appetite and financial objectives change with growing age and life stages. Tax planning needs to be at the core of investment planning at each stage. Let us have a look at how to approach it in different stages of life.
In your 20s
It is the start of your career. You are young, wild, and risk-savvy. You don’t have a lot of financial responsibilities, at least till you are 25. In this crucial decade of life, you need to make healthy and calculated risks. But before risking it, you first need an insurance plan for yourself and your parents, a primary financial concern in your early 20s. Remember that it will cost more with age. Health insurance will not only secure your health but also provide tax deductions under section 80D of the Income Tax Act.
Once you are insured, you can also think about mutual funds and ELSS (Equity-Linked Savings Schemes) as they are also good learning grounds for investment. Both of these instruments together can help you save tax up to Rs 1,50,000 annually under section 80C.
Apart from these popular tax-saving measures, you can also claim deductions on motor vehicle loans under section EEB (tax deduction up to Rs 1,50,000 for interest payments on electric vehicle loans) and buy your dream vehicle at an advantage. If your vehicle is being used for business purposes, even motor insurance can be considered a business expense and deduct your taxes.
In your 30s and 40s
You now probably have a family to look after. Your parents have retired, and you might plan for kids as well. There are multiple financial goals and responsibilities upon you, such as children’s education, weddings and vacations, and retirement planning.
You are ready to buy your dream home now. You should do it right away as it will also provide you with multiple tax benefits on your home loan. Firstly, your home loan interest would be deductible up to Rs 2 lakh a year under section 24. Secondly, stamp duty, registration charges, and principal repayment are all deductible under section 80C. There are also more benefits available upon affordable housing loans and joint home loans. While these are attractive benefits, you must also remember to insure your precious property with adequate home insurance and loan protection cover.
Along with a house, the next important requirement for your family’s lifestyle would be a four-wheeler. If you decide to think ecologically while making this purchase and go for an electric motor car, you will be rewarded with a tax deduction up to Rs 1,50,000 under section 80EED.
At the same time, you are also prudent with investments. Even if you have not invested before, it is now time to forget gambling and think more about the long-term sustainability of financial resources. It is time to take a health insurance policy if you have not already, if you have, then it might be time to enhance your cover to beat medical inflation and gain more security. It is also the appropriate time to begin retirement planning by investing in NPS (National Pension Scheme) and availing a tax deduction of up to Rs 50,000 under section 80CCD (in addition to the existing limit of Rs 1,50,000 under section 80C) as a bonus. Additionally, a Public Provident Fund (PPF) investment will provide attractive interest, adequate security in terms of risk avoidance, plus tax benefits under section 80C as well.
In your 50s
This is the peak of your earning potential. Your kids’ lives are also more or less streamlined, and the biggest concern on your mind is retirement planning. You must already have health insurance, now it is time to focus on a post-retirement corpus with PPF, NPS, and other retirement-focused plans. It would be wise to invest only as much in tax-saving instruments as is required.
During and post-retirement
This is known as the period when the next innings of your life begin. To ensure that you enjoy it to the fullest, you need to invest in instruments such as the Senior Citizens Savings Scheme (SCSS). However, the SCSS is not the only option. Tax-saver FDs are another safe bet. Additionally, being risk-averse is not a necessity post 50. Break the conceptions and go for extremely calculated risks to invest in debt-plus-equity, but only if you have the experience and expertise.
Final thoughts
Insurance is an often-forgotten factor in tax planning as well as financial planning at large. With the pandemic, our country is gradually becoming more risk-aware and realizing the importance of insurance. We are now moving towards a time when insurance will finally be a key tax-saving investment, as it must be.
It must also be stressed once again that tax planning must be merged with financial or investment planning if one is to do it sustainably.
If you want to check out general insurance plans, Reliance General Insurance has everything from critical illness covers to comprehensive health covers, vehicle insurance, and home insurance for specific needs. Check out the RGI website for details.
The author is ED and CEO, Reliance General Insurance
DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.