NRI guide to deal with inherited property (Adapted article from ET)
As 2016 approching its end and 2017 is about to beginning many of you would start planning for tax savings looking at end of financial year in March. I am focussing on this need by series of tax saving articles to educate about the whole tax efficient investments.
Many of you are too busy throughout the year, in your earning activities intended to make a living. But if you show the same dedication/ commitment in your tax planning exercise, the same will enable you to save more through tax planning and fulfil many of your dreams in life. Our experience reveals the following mistakes that individuals make while saving taxes.
1. Undertaking tax planning at the last moment:
The root of all mistakes in tax planning lies in waiting till the last minute to save taxes, which eventually leads to mere tax saving, rather than tax planning. And this in return is a sub-optimal way of saving taxes, caused by the sheer attitude of delay. Your last moment hurry, will often lead you to forgetting or ignoring the facets of financial planning such as your age, income, ability to take risk and financial goals (explained further in this series of articles).
Remember waiting till the last, is just going to lead you to a path of sub-optimal tax planning exercise, which would destroy the essence of holistic tax planning.
2. Unnecessarily buying insurance plans for the purpose of tax saving:
As you near the end of the financial year, many of you might have received telephone calls from insurance companies and agents pestering you to buy an investment-cum-insurance plan – typically market linked i.e. Unit Linked Insurance Plans (ULIPs) or some kind of Endowment plans. Realising the need to save your taxes, you may have even entertained these calls and eventually doled a cheque to buy one. But have you introspected whether you have done the right thing? Maybe no; either because of ignorance or in the urgency to save tax.
Remember when you think about insuring yourself, protecting your life against any unforeseen events; ideally buy a pure term insurance plans, which gives due importance to your human life value. You may note that ULIPs are investment-cum-insurance plans where, for the premium paid, the insurance cover offered is far less when compared to pure term life insurance plans. In the latter, for a lesser premium amount you get a bigger life insurance cover – which is precisely what a life insurance plan is intended for.
3. Power of compounding through tax saving mutual funds:
Many individuals rule out the concept of power of compounding to the portfolio despite the fact that age, income, ability to take risk, along with financial goals may support you to take risk. It is noteworthy that if you want to meet and / or elevate your standard of living going forward, you need to beat the rate of inflation. And thus, the role of equity as an asset class cannot be ignored in one’s tax saving portfolio too. While some do consider – equity oriented tax saving mutual funds in their tax saving portfolio, the ideal composition (depending on the risk appetite) is not maintained, which leads the tax saving portfolio to give sub-optimal returns.
It is noteworthy that being risk averse is well appreciated by us. But if your age, income, ability to take risk and financial goals, permit you to take equity exposure, one should not ignore the same.
4. Failing to optimize all available options for tax saving:
For many, tax planning starts as well as ends with Section 80C of Income-tax Act, 1961- which specifies investment instruments for tax saving. But investing only in these investment instruments would not lead to optimal reduction of your tax liability. There are many other options available other than Section 80C which you should look into. Thinking beyond 80C may help you save more for your other financial goals.
To bring to your notice, our Income Tax Act, 1961 also considers the humane side of our life and also gives deductions for contributions you make on such developments. So, in case if you pay your medical insurance premium, incur expenditure on the medical treatment of a “dependant” handicapped, donate to specified funds for specified causes, take a loan for pursuing higher education or if you are an individual suffering from “specified” diseases; then all these expenses can help you effectively plan your tax obligations, optimally reducing your tax liability. Moreover, taking into account the urge to buy your dream home by taking a home loan can also extend tax saving benefits to you.