For most people, tax planning and investment planning are one and the same things.
“I have already utilized the full limit of Section 80C. What else is left to invest for now?” – was the response of a friend, when I asked about his investments.
This mindset is not uncommon. Most people approach tax planning in a way that is exact opposite of what it ideally should be.
Tax planning is important no doubt. But it should be a part of the overall financial planning exercise and not just an end in itself. To put it simply:
Tax-savings should be the desired side effect of implementing a well thought out financial plan.
But unfortunately, most people scramble to buy whatever tax-saving products they can buy at the last moment (in March). All they want is to get the maximum possible income tax benefits. Whether the product being purchased (or rather sold to them) is right for them or not is immaterial.
Its like the government has promised to give discounts on certain medicines. So you go and buy the medicine, which gets you the biggest discount. You are not concerned about whether the medicine you are purchasing is suitable for you or not. And that is plain stupid. This mindset will definitely have a detrimental impact on your health.
Same is the case with hastily bought tax-saving products. Your financial health will suffer eventually.
Traditional life insurance plans like endowment plans, money-back plans etc. are some of the financial products that are best avoided. As mentioned earlier this year too, even I have wasted money on these products some years back. But I don’t put money in them now – It’s a no brainer. These plans only benefit the insurance agents selling them.
So importance of cleaning up our personal finances cannot be ignored. We need to buy/invest only those financial products that put our families and ourselves on a solid financial base and also help bring peace of mind. And tax-planning alone cannot achieve these things.
Before you decide to plan your tax-saving investments, think and finalize your financial goals. It can be different for different people – retirement savings, children’s education and marriage, buying a house, saving money for starting a business in future, etc.
Don’t worry if you are unable to think through your goals on your own. Don’t hesitate in taking help of some good investment advisors (and not agents). They charge you for their advise but its worth it (ofcourse only if you have carefully selected your advisor).
Once your goals have been finalized, it is easy to chose products that suit your goal requirements and also, are in line with your risk appetite.
In the long run, product suitability for your financial goals is more important than just saving taxes. Your kids won’t be concerned about how much tax you saved in previous years, if you are unable to fund their education with your savings (that is if you have made it clear to them that they won’t be needing education loan to do that).
And you don’t want to face your kids like that. Isn’t it?
So either don’t promise them anything or prepare well for coming good on your promises.
Right product depends on your financial goals and there is no one fixed answer to questions about ‘best tax saving products’.
If you ask other people about the best Tax-Saving products, the answer you get would depend on the person you are asking.
A life insurance agent will tell you its endowment or moneyback plans (not term plan).
A health insurance agent will tell you to buy health insurance plan.
A mutual fund distributor will tell you to go for ELSS.
And I won’t blame them fully for selling unsuitable products at times. They also need to earn to survive and its their job to sell their employer’s products to customers like you and me.
Interestingly in India, it’s the government that does our financial planning 🙂 by changing tax rules, tax limits, etc.
And that is the reason why everybody is so excited on budget days. Everybody wants to know whether tax rates have been reduced or are there any increase in tax deductions. If people gave the same importance to their financial goal planning, then it would help them much more.
Now without taking anything away from chartered accountants and their contributions towards helping us save taxes, I must say that most of them are focused on maximizing tax savings. Nothing wrong with that as its their primary motive.
But you need to understand that tax saving is not the most important part of your financial life.
Primary aim of tax planning might (and I repeat ‘might’) not be to grow your money. Rather it is to reduce you taxes.
So it is possible that suggestions made in a good tax plan might collide with those made in a good financial plan.
It is upto you to understand the difference between both the plans. After all, its your life goals which you need to achieve and not your advisors’ or CAs’. Isn’t it?
If you are among those who are late with their tax planning, then think about it. Having the right financial plan (which addresses all your financial goals) is more important. Take out some time to create a solid financial plan (or get it created) and then go about saving taxes. And if that means that you are unable to fully utilize the available tax deductions for an year or so, then so be it.
You can still be happy if you save slightly less tax. 🙂
Now don’t think for a moment that I am against saving taxes. (Why will I even think of such a thing?) 🙂
All I am saying is that merely planning to save taxes is not enough.
Tax planning should be an integral part of financial planning.
Once you have figured out a financial plan suitable for you, putting aside money to take advantage of tax breaks will become easier. You will no longer be confused about what tax-saving products to buy or what to do in the month of March every year.
So still 255 days are left before this financial year ends. Don’t wait for the last moment for tax planning (or rather investment planning). Get going now.