Time for Tax Planning

In life, two things are certain – death and taxes! 31st March is less than Four months away and you surely now have adequate time to focus on one very important task for the financial year. Tax Planning! You have just about enough time to assess your financial records and plan investments for tax saving purposes. But don't get too comfortable just yet. Time is of the essence when it comes to tax planning and the remaining months will fly away soon. We don't want to end up in the middle of a lot of unfinished work, forced to make last-minute investments in sub-optimal instruments just to save tax. You may end up saving tax but will this investment align with your overall investment goals?

Let us not wait for March month and be done with all tax planning as early as possible. Last minute tax planning decisions, taken in haste often are not the ones most suitable for you. We would suggest it is time to start tax planning right away. The question now is how do we start?

Step one: Assessment of gross income

The IT department has identified five specific heads of income under which all income is classified. These are (a) Income from Salary (b) Income from House Property (c) Profits & gains from Business/Profession (d) Capital Gains & (e) Income from Other sources.

The first step is a fair assessment of the gross income for the financial year. You already have crossed over nine months and we believe you will have a fair bit of idea for income accruing in the remaining months. There is no need to arrive at an exact figure. An approximate figure is enough to know the income for the fiscal year. While arriving at the gross income, please do consider all incomes including things like interest on bank savings, interest earnings from investments made, rental income, etc.

Step two: Assessment of taxable liability

The next step is the computation of the net taxable income. For this, we will be taking into account the exemptions /deductions provided by the government for the above-mentioned income source. We will be also considering the tax saving avenues already used /invested in by us during this financial year. Just to highlight, the following things will have to be considered, subject to the taxation rules,

1. Investments made in tax saving instruments u/s 80C

2. Rent paid for residence

3. Insurance premiums paid

4. Home loan – interest and the capital amount repaid

5. Medical expenses for disease treatments

6. Expenditure on handicapped relatives

7. Other allowed deductions like tuition fees, donations, etc.

After arriving the net taxable income, depending on our income level and our personal profile (age + gender + tax entity type) a particular taxation slab will be applicable to us. This will help us arrive at the tax liability for the year.

Step three: Planning for tax saving

You now have a fair idea of the amount of taxable income and tax liability applicable as per tax slab to you. The next step starts with you deciding how much tax savings you want to do? The idea is to reduce your taxable income so that the tax liability decreases. Thus you will have to work out the right amount of investments to be made in approved instruments which are allowed as deductions...

Note that not every decision is driven by tax saving purpose. For example, taking insurance in itself is very crucial and the decision on it should be taken independently, irrespective of tax saving benefit available or not. Tax saving in insurance products must always be a secondary consideration, as a by-product. As such insurance requirements have to be discussed with your advisor, the sooner the better. Certain insurance premiums are allowed for deduction u/s 80D, 80DD and 80DDB.

We have finally arrived at the stage where we have to select the investment product(s) with the primary objective of tax saving. The most important section here is of 80C which has many approved investment avenues which collectively allow deduction of up to Rs.1,50,000/- from taxable income. The most popular investment instruments available here are...

• Mutual Fund Equity Linked Savings Scheme (ELSS)

• Contribution to Public Provident Fund (PPF) and Employee Provident Fund (EPF)

• Tax saving Fixed Deposits (5 years & above)

• National Savings Certificate (NSC)

• Pension Plans

• Others Investments like Sukanya Samriddhi Yojana (SSY), ULIPs, Senior Citizens' Savings Schemes (SCSS).

There are also some payments eligible for tax saving deductions u/s 80C which have to be considered, if any.

• Life Insurance premiums

• Home loan repayment (principal amount)

• Children's tuition fees

Further, there is also an additional deduction of Rs.50,000 available for investments made into NPS u/s 80CCD which is over and above the 80C limits.

The question now is what you will choose?

To decide we must see the advantages and disadvantages of our preferred products and also our own financial objectives. Parameters like liquidity (lock-in period), risks, returns potential and your existing investment asset allocation, can be considered to decide on the right investment instrument. Please note that even interest rates on government saving instruments are revised from time to time. How much net real returns over inflation can I expect from my returns? is something that you must question yourself.

We don't wanna push you towards any particular product, though we believe in ELSS as the ideal tax saving instrument u/s 80C. However, overall tax planning is a wide subject and we would suggest that you take the opportunity to sit with your financial advisor and make a fair assessment of the needs and then select the right instruments. It is also an opportunity to take an independent look at your insurance coverage, just in time before the end of the year.

You must have recently read news about Boris Becker actioning his trophies and other memorabilia. It was indeed sad that one of the greatest stars of tennis had to sell his most prized possessions to fund his bankruptcy and pay money to creditors. Back home too we often see well-off persons falling into financial crisis. Today, even Mr Anil Ambani is facing a financial crisis in his business group and was even at the verge of being arrested.

No one can guarantee that a financial crisis can never come in one's life. It may be due to wrong financial decisions, setbacks or unseen developments affecting your industry, loss of a job, any unexpected medical costs at home or even falling victim to any fraud. It is quite possible that even a single mistake or event can wipe out your years of hand work and the wealth that you have created. Not making big financial mistakes or blunders is at the cornerstone of your wealth creation journey.

What is also important that you are always careful to avoid any such scenario in future. Prevention is better than cure – this has to be practised. Being always prepared to avoid and even to deal with any financial crisis in important. Here are a few ways in which you can be prepared...

1. Separate business from personal finances: One of the most prudent decisions is to separate your business /profession with your personal finances if you are into any business. It is also important that you do not put at stake your personal wealth to meet your business needs and vice versa. Doing this may leave you without any financial backup in future. If the business is not doing good, it is better to find solutions within the resources available for business. Once personal assets are put at stake and business fails, you are left nowhere to go.

2. Prepare to be frugal: Being frugal does not mean compromising on your quality of life. Being frugal is all about avoiding unnecessary things in life and making the most of the resources already available. Whether be it business or personal life, being frugal helps in keeping your expenses down, reducing risks of any crisis and also making you better prepared for any crisis should it occur.

3. Do not leverage too much: Leveraging would mean taking too much credit or loan to finance anything. Leveraging to create assets which will increase in value in future is always better than investing in assets that depreciate. Even while taking credit to finance investments in income or wealth-creating assets or business, one should never go over-board.

1. Do not spread yourself thin: Quite often we have seen that people commit or deploy all their funds in business or different assets. A reserve or an emergency fund is what you must first aim for to create to finance any temporary setbacks or dull periods of business or profession. A good backup goes a long way in avoiding any crisis.

2. Do not put all eggs in one basket: Be it investing or in business or profession, it is always better to not risk everyone on one venture or investment. One of the most common things found in millionaires is that they have multiple sources of income so even if one is compromised, they are not likely to be affected much.

3. Take only justified risks: While taking risks is a part of business, it is not justified that any undue risk is taken, especially when it comes to unknown persons or any unexplored opportunity. Any risk, whether be it business or investment or any income opportunity has to be well-researched. If there is a promise of huge returns by someone, an offer too good to be true, it is not going to be true. Being in control, listening to your instincts, consulting your advisors and not falling prey to greed are some of the things you must practice.

4. Be adequately insured: It would be foolish if you are at a big financial loss which could have been avoided had you taken adequate insurance for a small cost. That small cost is the cost of peace of mind that you must pay but unfortunately, even that is seen as big till the time tragedy strikes. At a personal level, health, personal accident, critical illness, life, travel and home are some of the insurance policies available to you to avoid any likely financial risks arising from any unfortunate event. For your business/profession too there are many policies available to avoid damages by theft, accident, fire, legal claims, etc.

Being big in life:

There are many things that a person can create without huge financial investments. And these things will surely make you better prepared than anything else in life which can be counted. So what are these things?

1. A strong team: Building in a strong team in your business or profession can make you very grounded and stable in business. Being a good leader and investing in good people and helping them develop will always make you win as a team. At a personal level, having a team of a good banker, accountant or even a lawyer will help you in avoiding and managing your crisis better.

2. A strong brand: A strong goodwill and brand for your business or at a personal level also go a long way. Even at a personal level, if you are seen as a trustworthy and dependable person in your family and friend circle, it should help you a lot. This though comes over time when you also are helpful and supportive of those around you.

3. A strong network: A well-networked man is much more likely to be successful. Again, one of the most common things among millionaires is the strong network that they enjoy. A good social or business network brings opportunities and solutions too to the problems you may have. Do actively spend your time and resources in building a proper network in life.

Do you ever imagine why few people appear to get rich easily while most of the others live their entire life full of financial struggles? Have you wondered what is that difference which makes few people rich – is it education, hard work, intelligence, luck, family background or is it about their choice of work, job, business and investment?

You will be surprised that the answer to the above is No, according to one of the hugely popular books on personal finance “Secrets of the Millionaire Mind” by T. Harv Eker. Eker says that though few of the things mentioned may contribute to financial success, the underlying reason for success itself is quite different. goes. In this piece, we will attempt to go deeper and unravel what makes the real difference between the rich and the poor.

It's very much about how you think:

It can be said that poverty begins and is rather allowed to continue in one's imagination first. One's actual material life then becomes a self-fulfilling prophecy of this image. You ultimately become what you think of yourself. If you are always thinking about problems, are small minded, keep finding faults in everything and worse, think low of yourself, then that is what you may end up living your life with. The need for self-admiration, thinking big, thinking about possibilities and opportunities cannot be underestimated.

But, everything else remaining same, why do we think the way we do? The answer to this question is given below.

Your subconscious mind plays a critical role:

Right from childhood we are subjected to subconscious learning from our families, friends, schools, events happening around us and so on. This is the main reason people with different family backgrounds and cultures tend to think differently. Imagine a typical Gujarati /Punjabi /Sindhi business family and compare that to any well-educated South Indian family. You can almost predict how the lives of children will shape up in such families and what will they do in their lives. The risk-taking ability, money management skills, attitude to wealth, etc. are ingrained in our subconscious minds to a greater extent than you think. This plays a very crucial role in shaping who we are and who we will be in our lives. If your subconscious mind is not set for a high level of success then probably you will never have a lot of money. The good news is that you can change this subconscious mind with your conscious and continuous rethinking on these aspects of life.

How the rich think and act differently?

Now that we have established that your thinking mind and your subconscious mind plays a very important role in financial success, let us get back to the starting point – the difference rich and poor. It would be really interesting to see how a financially successful guy is thinking differently from a financially deprived person.

1. Rich people believe in creating their own future and destiny. Poor people let life happen to them and accept their destiny.

2. Rich people make it their game to win and make more money. Poor people tend to play the money game safe so as to not loose.

3. Rich people live their lives as if they have a commitment to being rich. Poor people live life as if they want to be rich and are more eager to showcase being rich rather than being actually rich.

4. Rich people think big, think about possibilities and opportunities. Poor people think small, think more of obstacles and difficulties in anything they do or think of doing.

5. Rich people focus more and spend more time exploring and exploiting opportunities. Poor people spend more time talking about obstacles and focus on solving problems in life.

6. Rich people admire, learn from and aspire to be like other rich and successful people. Poor people normally resent, find faults and crib about rich and successful people but never learn.

7. Rich people tend to associate and network with most other rich, positive and successful people. Poor people tend to associate with their likes or other negative or unsuccessful people and do not network.

8. Rich people are willing to promote themselves and their value and tend to create a personal brand for themselves. Poor people do not like personal selling or promotion and do not indulge in making a personal brand or value.

9. Rich people often think of problems as smaller than themselves and something which can be resolved easily. Poor people often think of their problems as bigger than their capability and something which would need tremendous efforts.

10. Rich people are very good at observing and learning what they need to from virtually anything or any person. Poor people are poor at observing and learning and often tend to only believe that they know.

11. Rich people tend to work smart for results or profits based on their intelligence and enterprise. Poor people tend to work hard and choose to get paid based on time and work done.

12. Rich people think of getting the maximum advantage of any situation or deal and not loosing. Poor people think more of a win-win situation and choose either among options available to them.

13. Rich people know, keep track of and focus on building their net worth. Poor people focus more on their working income rather than their actual net worth.

14. Rich people are good at managing and growing their investments /wealth. Poor people often mismanage their wealth and tend to make sub-optimal investments.

15. Rich people put their money to good use and make it work hard for them. Poor people focus on working hard for earning their money but do no put their money to work.

16. Rich people are more courageous and tend to act in spite of fear by taking calculated risks. Poor people are overwhelmed by fear and tend to not take any risks.

17. Rich people are committed to learning and they constantly learn and grow themselves. Poor people are laid back thinking that they already have enough knowledge and do not learn actively.

As Eker says, “The size of the problem is never the issue—what matters is the size of you!”. Understanding the above differences in thinking and changing our own thought process should be our goal. These changes, when put to practice in real life, will act as the steps or blueprint to dramatically improve our financial success factor.