Machibet777 LiveWhy April is the best month to start tax planning

When final exams approach, children who neglected their studies throughout the year have to struggle. Before you judge these Rip Van Winkles, keep in mind that many taxpayers do the same with their tax planning. They wait till the last few months (or even weeks) of the financial year to finish their tax-saving investments.Data from the Association of Mutual Funds in India (AMFI) shows that during 2021-22, more than 40% of the total ₹21,134 crore inflows in equity-linked savings scheme (ELSS) funds came in the last three months. March alone accounted for more than ₹4,000 crore.“ELSS inflows in the month of March are usually 150% higher than the monthly average,” says Aditi Kothari, vice-chairperson and head of sales and marketing, DSP Investment Managers. The same is true for life insurance policies and other tax-saving investments.Investing is serious business, and you need to study a financial product in detail before you put money in it. More importantly, tax-saving investments should be part of the overall financial plan of the individual.Invest in ELSS funds if your portfolio requires equity exposure. Buy an insurance policy if you need life cover. Pour money into NPS (National Pension Scheme) if saving for retirement. Go for PPF (Public Provident Fund) if you need to invest in fixed income for the long term. Invest in NSCs (National Savings Certificates) or tax-saving fixed deposits if you need the money back soon. medium90979279“Your tax-saving investments should be in sync with your long-term investment objectives,” says Amit Maheshwari, tax partner at tax consulting firm AKM Global.But it is not possible to assess the suitability of an investment if you crunch your tax planning into a few weeks of the financial year. For instance, ELSS funds have become popular among taxpayers in the past 10 years, but you have to zero in on the most promising scheme.There is a very wide variation in the performance of ELSS funds. In the past three years, the best performer, Quant Tax Plan, has moved at a scorching pace of 38.27%, while the worst performer, Aditya Birla Sun Life Tax Relief 96, has risen at a snail’s pace of 9.41%. The difference is too stark in absolute terms. Someone who put ₹1 lakh in Quant Tax Plan in April 2019 has seen his/her investment more than double to ₹2.64 lakh in three years, while an investor in Aditya Birla Sun Life Tax Relief 96 is sitting with merely ₹1.3 lakh.The other problem is that last-minute tax planning loses the SIP (systematic investment plan) advantage. ELSS funds are equity schemes and carry the same risks as any equity fund. In fact, the risk is greater because you cannot exit before three years.Jaipur-based Roshan Aswani has been investing in ELSS funds for equity exposure. ELSS funds account for almost 40% of his equity portfolio. Some of these investments are almost 10-12 years old. “The lock-in is long over, but I haven’t withdrawn from these schemes because my portfolio needs equity exposure. I want to remain invested for the long term,” he says. medium90979288Don’t buy insurance in hasteELSS funds have a very short lock-in period of three years. They also do not force investors to continue investing if they aren’t satisfied by the returns. But life insurance policies are a different ball game. A life insurance policy is supposed to cover the risk of early death and safeguard the financial goals of the individual in case something untoward happens to him/her.Buying a policy without understanding its features or assessing the extent of the coverage you need is the worst way to take life insurance. Yet, lakhs of insurance policies are sold in February-March, with buyers signing blindly at specified places in the application form.When buying life insurance, assess how much insurance you need. A thumb rule is to buy a cover of at least 8-10 times your annual income plus any large borrowing. For someone with a salary of ₹1 lakh per month, that adds up to a life insurance cover of around ₹1-1.2 crore. Add to that an outstanding loan of ₹30 lakh and the total insurance required is ₹1.5 crore. medium90979306It is unlikely that the insurance policies hawked by agents and bank representatives can offer such a huge cover without pushing the premium into the stratosphere. But a term insurance policy can provide a cover of ₹1.5 crore to a 30-year-old person for as little as ₹12,000 a year. No bank representative will suggest a term cover, and no agent will try to sell you one because the commission is very low.The change in tax rules for Provident Fund has robbed high-income earners of a lucrative tax-free avenue. Such investors should consider putting money in Ulips (unit-linked insurance plans) where the income will be tax-free if the premium is less than ₹2.5 lakh a year. But buy a Ulip only if you already have enough life insurance, and can continue with the policy for the full term. Most importantly, understand the charges and the features of the policy before signing up.Just like life insurance, you also need to understand in detail the features of your health plan. Check out the exclusions and the limits in your plan, and the extent of the coverage it provides. Unfortunately, many buyers look at health insurance from the perspective of tax deduction and buy a cover with a premium of ₹25,000 only. But in the past two years, many buyers have realised that a medical cover of ₹3-5 lakh can be woefully inadequate.Fixed-income investmentsInvestors who do not have a high risk appetite should consider fixed-income instruments for their tax planning. PPF is a terrific instrument loaded with several benefits. Given the liquidity it provides, taxpayers like Kolkata-based chartered accountant Tilotama Gourisaria use PPF as an emergency fund from which they can withdraw in case of an urgent need.While ELSS investments should be staggered in monthly SIPs, it is better to invest in fixed-income options at one go. This may not always be possible given the cash flow of the salaried household. Still, invest as much as possible early in the year to gain from compounding. When investing in PPF, make sure you do so before the fifth of the month so that you don’t miss that month’s interest.Saving for retirementMany tax-saving instruments are geared for long-term savings. The NPS can reduce tax in three ways. Contributions to the NPS are covered under the overall deduction of ₹1.5 lakh under Section 80C. If a taxpayer has already exhausted this limit, he/she can avail of the additional deduction of ₹50,000 under Section 80CCD(1b). The last one is a super taxsaver. If the employer puts up to 10% of the basic salary of the individual in the NPS, that amount will not be taxable. medium90978948For example, a taxpayer with a basic salary of ₹1 lakh can opt to put ₹10,000 in the NPS every month (₹1.2 lakh per year). This can reduce his/her tax by almost ₹37,500 per year.NPS can also be used by self-employed taxpayers like Anil Jajoo to reduce tax. He uses the low-cost scheme to save for retirement and reduce his tax and plans to shift his superannuation fund from his previous employer to the NPS. “The ultra low costs of the NPS help deliver higher returns than what mutual funds can give,” he says.Smart ways to invest in ELSS fundsGrab the SIP advantage: Don’t invest in ELSS at one go at the end of the year. These are equity schemes and monthly SIPs are the best way to invest in these funds. But if you start in January, you can fit in only 2-3 SIPs before the end of the financial year. “Ideally, a taxpayer should start an SIP in an ELSS fund from April through the whole financial year so that he does not get worried by the volatility,” says Raj Khosla, managing director of MyMoneyMantra.com.Check long-term performance: Don’t be guided by the short-term performance of a scheme. Look at the long-term record before investing. “Investors should not only look at 5-7 years’ performance of a scheme but also how long the fund manager has been at the helm of the fund,” says Aditi Kothari, vice-chairperson and head of sales and marketing, DSP Investment Managers.Assess portfolio attributes: Not all ELSS funds are alike. Some portfolios are focused on large-cap stocks, while others have a good mix of large-, mid- and small-caps. The portfolio mix also determines the risk and the rewards for investors. We have placed the top ELSS funds into three broad categories. Choose a fund that suits your risk appetite. medium90978706 medium90978713 medium90978722Don’t go for dividend option: Tax rules have changed in the past two years. Dividends are now taxable, as are long-term capital gains beyond ₹1 lakh. While it is possible to manage and adjust the tax on capital gains, the dividends are added to income and taxed at normal rates. So, don’t go for the dividend option in your ELSS fund.Keep monitoring performance: While holding equity funds for long periods is a good strategy and helps build wealth in the long term, investors need to monitor their portfolios as well. Some of the ELSS funds in Roshan Aswani’s portfolio have not done too well. HDFC Taxsaver and SBI Long-Term equity are long-term underperformers that should have been dumped some years ago. medium90979128How investors are moving away from small savings towards MFsThe many dangers of social investingYoung investors are the new bulls, apps the new brokersFive ways to check leaks in your investment portfolio medium90979138