We are in the first week of October and in other words it is the start of the second half of the financial year. By now you must have got an intimation from your employer asking for your investments and if not, then you are about to get one. If you are into business or a self employed professional, your accountant must have asked you all these things on the date of advance tax payments of September 15, 2007.
As it is rightly observed, tax is the only certainty on this planet after death, it is one's preparedness to manage the tax liability effectively that can spare him from unwanted outcomes afterwards due to non-compliance to norms.
Many of you look at it only in the month of March, when salaries are reduced due to tax deduction or your tax guy comes calling if you are into a business. This is one for the prime reasons behind income tax payment being seen as a big inconvenience.
The advance tax payment that falls due on September 15 should be seen as a wake up call for all of us who are assessed for income tax, to check whether we are liable for advance tax. If you still have not begun the process of planning for income tax, you better do now. This will enable you to produce all your investment proofs by end of December.
As the first step on this path, you should get down to the computation of income tax liability. If your employer issues the projections in your salary slip, this is a very easy task. If it is not the case then you have to compute it on your own.
Look at the income net of the professional tax and then ascertain in which tax slab you fall into. Once you have ascertained your tax-liability based on the gross income, you can look at the existing commitments you have on the investment front. This will typically include the salary deduction under the head of provident fund. Here you will also consider the renewal premiums of the existing insurance policies.
If you have taken a home loan, collect a provisional tax certificate from your banker. The provisional tax certificate will help you ascertain the exact amount of interest and principal that will be paid to the bank when you pay the equated monthly installments, in the financial year. Also note that any prepayment of loan will change this brake up. Hence if you intend to do so, then plan beforehand as the bankers take their time to issue the revised tax certificate.
Once you know the exact amount you need to invest, you have to see how your portfolio looks like. Here is an opportunity to take corrective measures. If it is skewed towards a particular asset class and your risk profile is not in sync with the risk of your portfolio, you may chose to rebalance it.
Let's understand this with an example. Say, if only 45% of your investments are into equity and your ideal asset allocation stands at 60% equity, then you can channel your investments for tax-relief in avenues like ELSS that offers you an exposure to equity. You may also consider investing into a ULIP with high allocation to equity. On the other hand, if your asset allocation needs to be enhanced on debt side, you may consider investing into avenues like postal schemes and public provident schemes.
Once you arrive at the asset classes where you intend to park your funds then look at the available options within each asset class. Like any other investment, these are to be weighed on the parameters such as returns, liquidity and credit worthiness. In most cases the credit worthiness is good as most issuers are strong on this front. The minimum lock-in period here is three years and returns may vary depending on the riskyness of the asset.
In most cases the timing of the investment is of little importance. However, if you are investing into equity, the way you invest matters. For the equity option in a ULIP and equity linked saving schemes (ELSS) in mutual funds consider the systematic investment plan (SIP). This will ensure that the risk with regard to timing will be mitigated. The minimum SIP entails 6 installments. Hence if you start today you can very well work out your tax investments in ELSS over the next six months and get the full benefit in the current financial year.
If you a savvy investor, you may consider putting all your funds in liquid funds and then use switch each month shifting some funds into equity funds as need be.
For ELSS our top picks are SBI Magnum Taxgain and HDFC Taxsaver. You may also consider investing in Pru ICICI Taxsaver or a Birla Sunlife Equity 96. Though some of the advisors are recommending the duo from Principal mutual fund, we avoid these two schemes because of their unduly aggressive portfolio.
If you are intending to buy a ULIP, please do opt for a single premium ULIP plan over a regular premium ULIP plan. The benefit will be discussed at length at some future date. In single premium ULIP we are more comfortable with TATA AIG Life, ICICI Prulife and HDFC Standard Life Insurance. We do not recommend Bajaj and Aviva till the controversy over the actuarial funded products is over, though it has no direct bearing on the single premium plans by the life insurers.
Article courtesy: UMCapital |
