Why tax planning is important for a successful financial plan


When creating a financial plan, whether long-term or short-term, considering the tax implications is very crucial. Most people forget about tax planning when planning finances and only think about them as the end of the year approaches. This is definitely not the best way to go about it. Tax planning should be an integral part of your financial planning in general. We will discuss here why as well as will talk about some of the most efficient ways to plan your taxes to save as much as you can by utilising the various tax-saving investments and options available to citizens in India.

For most of us, the top ways to save taxes when filing Income tax returns are limited to buying insurance policies or investing in tax-saving mutual funds or opening and investing in a PPF account. While all these options are brilliant ways to save tax, investing without proper planning and just for the sake of saving tax will prevent you from making the best out of all the available tax-saving investment options.

Why tax planning is needed

Tax planning refers to the process of managing your finances and investments such that you have to pay the lowest taxes possible.

While most salaried individuals are aware of the top tax-saving options covered under sections 80C, 80D, 80E, and so on, they fail to align their investments with their financial plans to get the best out of both worlds. This results in tax planning becoming a standalone and usually year-end activity, where they just end up investing in whatever seems best at the time to avail of the maximum deductions possible. Here’s why this is a problem.

Suppose that you have a yearly income of INR 5 lakh and you plan to save/invest 40% of it, i.e. INR 2 lakh. If you generally plan your finances at the start of the year in April, you might choose to allocate the entire sum of INR 2 lakh to your preferred investment venues, such as equity, debt, gold, real estate and other options without worrying about taxation or IT return, which is not due for another year. But, that’s where you go wrong. When the filing period comes and you start preparing your IT returns in February or March, you’ll realise that none or only a small part of your investments are contributing to saving tax. Then, you’ll try or would want to invest in tax-saving venues to avail of as much deduction as possible. But, the problem is that you have no funds left for investing because you have already allocated those funds to other venues without bothering about tax implications. THIS IS WHY tax planning should be aligned with financial planning and not left as a year-end task.

Other than that, tax planning in line with your financial goals is also important to ensure your savings and returns are not eaten away by taxes. We have seen this happen countless times. Because people fail to pre-plan taxes to make the best use of tax-saving investments, they end up paying a lot more tax than they otherwise would, which affects their financial planning and goals.

Did you know efficient tax management is considered one of the core pillars of financial planning, with goal-based asset allocation, debt management, and adequate liquidity being the other ones?

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How to integrate taxes into your financial planning

It is perfectly simple. Just consider taxes when planning your finances. Looking to start a SIP (systematic investment plan), think about an option where you can also save tax without compromising on returns. The idea is to consider returns in post-tax terms.

To start with, you should know about all the ways you can save tax, not just insurance policies and some saving schemes. There are many ways to save tax, including schemes such as Sukanya Samridhi, PPF, EPF, and others. Did you know your child’s education/school fees may also be eligible for a tax deduction and so can the rent paid by you on a rental property? If you are looking for a tax-saving option with high returns, you can consider NPS (national pension scheme) or ELSS (equity-linked saving scheme), where the funds are reinvested in market-linked instruments.

Do read about all types of tax-saving options and then consider them when planning your financial goals to keep your tax planning in sync with your financial plan.

Authored by Amit Gupta, MD, SAG Infotech

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