Wednesday, April 6, 2011

Best time to do tax planning

Samy went to his friend, Aseem’s house on Sunday evening, a day after India’s historic win in cricket world cup.  Aseem’s afternoon siesta was well extended till evening hours.  Samy commented “Seems that you had a big party last night after the finals.  You look pretty tired.”
Aseem smiled and said, “Yeah, last night was a gala party.  After all, my favourite, Dhoni played a role of sheath anchor.”  He was very happy with the performance of Indian team.  He added “However, the tired look has more to do with the year-end pressures at office rather than the party.  Last couple of weeks was very hectic with year-end sales target and pending tax related investments.  Add to it the exciting world cup matches.  It has taken a toll on me.”
“I can understand the year-end sales target, Aseem. But what you meant by pending tax related investments?” Samy curiously inquired.
“That is 80C investments which we are required to do.  Plus I had to submit medical bills and home loan certificate to claim tax deductions.”
Samy nodded “Yeah. This is also a priority otherwise extra tax gets deducted from our salary without any liability.  So where did you invest?”
“I had this agent who was calling me repeatedly since last two months for tax related investments.  He helped me out in buying this insurance cum investment plan, so that I get the twin benefit of insurance and investment….oh… not twin but triple benefit…of tax deduction too.” Aseem smiled.
“But I recollect you said once you had adequate term cover for insurance. Isn’t it Aseem?”
“Yes, I do pay the premium for term insurance.  But it is not sufficient enough to get entire tax benefit.  Hence I was thinking to invest additional sum in PPF or other investment products.  But this agent convinced me this insurance plan has market linked returns and it will be higher than PPF returns.” Aseem said justifying his investment “Hence I opted for it.”
“Aseem, I am not sure whether this was the best product for you to invest.  But one thing I can surely say is that your agent took the advantage about the lack of time and made you to invest in a product for which you were not having adequate knowledge.”
“Yeah.  I agree that due to lack of time, I did not do adequate research on the product which he sold to me and trusted on his assurances.” Aseem acknowledges.
Samy adds “And you could have avoided all this had you started your tax planning earlier.  In fact, I would suggest this is the right time for you to start the tax planning for the next year.”
Aseem had a surprised look on his face.  He argued “April is too early.  May be December or January is the best period.”
“December – January is good time to think about tax planning, but it is not the best time.  In case you had started your tax planning early last year, say in April, you may not have gone for that inappropriate insurance cum investment plan.  Furthermore, you could have concentrated more on your year-end sales target.
“Starting early has its advantages.  One is it gives you time to compare various alternatives available and decide which is the best option for you.  The agents are also not behind us during this period to bias our investment making decisions.  Second since you have already decided on the choice of investments, you can start spreading your investment throughout the year.  Thus you do not have any major cash outflow at the later end of the year.  In case of any market linked investments, it also helps in averaging the purchase price during volatile markets.  Third, having your tax planning done at the outset, you estimate what you will be earnings during the year and helps you know the yearly tax outgo.  Thus you have better financial visibility.”
Aseem agreed “Yeah.  You have a point here.  May be I should use this opportunity and start my tax planning for this year immediately.”
Samy smiled and gave thumps up “Yes and do let me know in case you require any assistance in tax planning.”

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