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Anand

Wednesday, February 23, 2011

Thoughts to Ponder Before Filing your Income Tax Returns

It is that time of the year when everyone is scrambling around to save tax. Oh yes. Its February and by March 31st the financial year is over and everyone is running around trying to figure out options to save their income tax. And it wouldn't be appropriate if I don't write something for my friends who are in the same mood. This article is going to be about things you need think of and consider before making investments to save your income tax.

So, lets get started!!!

What is Income Tax?

Before we get any further, it would be most appropriate to refresh to everyone what Income Tax is. Income Tax is the money every individual owes to the Government in the country where they work and earn an income. So, everyone who works in India and earns an income has to pay income tax to the Government of India. Now, with that being said you are probably saying “I know that already Pal, get down to business will you?”

Oh yes, I will. Just one more thing. The government of India has certain rules on the tax income slabs and the ways that an individual can reduce his income tax liability. All that info that bores you to death can be found below:

Income Tax in India

Changes in Indian Tax Laws for the financial year 2010-2011

Is Saving Tax Good?

Of course yes. I have said it a zillion times and I wouldn't mind saying it again. “Saving Income Tax is Good” for the following reasons:

1. You pay a lesser amount to the government as Income Tax
2. You get to save some money for your future.

We need to Change our Mindset

Yes, you read it right. We need to change our mindset. Everyone looks at investment as an opportunity just to save tax. On the contrary, investment is something you do to save some money for your future and the tax benefit is just an added bonus. The motivation to invest should be to safeguard our financial future and not saving income tax. I normally find that we tend to think about tax first and investments later. As long as something saves tax, we overlook its characteristics as an investment. Most of the time, deciding on investments at the last minute means that they are chosen more for convenience/availability than suitability.

Why should we consider the Characteristics of an Investment?

Because “IT IS OUR HARD EARNED MONEY”. Investing in something that you are not really sure of can effectively mean that “You are flushing your hard earned money down the toilet”
That might sound a bit exaggerating, but the fact is, bad investments can hurt our wallet pretty bad. Just because you save Rs. 30000/- you cannot go and invest in some junk investment option that is gonna rip you off the whole 1 lakh you invested in it. What good would that make? Get the Point?

Given the mandatory lock-in period in all tax-saving investments, it makes sense for investors to carefully consider this factor before blindly investing/locking their money in them.

There are numerous options that are available to save tax. You may want to look at this article for more details about how to save tax using investments by “clicking here

Questions to Ask Yourself before making an Investment Decision to Save Tax:

Since taxes are paid on a yearly basis, tax planning becomes an important activity in the process of saving the amount that a person is entitled to legally (Of course, legally. I wouldn't suggest anything that is illegal, would I?).

However, we need to be careful to consider the following before investing. Lets look at them one by one.

1. What are my Requirements? – Short or Long Term?

This is an extremely important consideration. The aspect of the investment to be considered here is the “lock-in” period. Options like ELSS Mutual Funds have a lock-in period of only 3 years whereas options like PPF have a lock-in of 7 years. So, you need to plan about when you will need the money back before deciding on the investment option.

2. What is my risk taking ability?

This again is a very very important consideration. The returns you earn on your investment will be directly proportional to the risk you are willing to take but at the same time, risky instruments have a potential for loss too. There is no guarantee for capital in investments like ELSS because the money is invested in the stock market. Whereas, investments like NSC or PPF are fully 100% capital guaranteed. So decide on your risk taking ability and choose the investment options appropriately.

3. How much do you know about the product?

It is mandatory to check out the credentials of the investment instrument before putting our hard earned money into it. Don't go by hearsay. Do your own research or consult with your friends who are good in the finance and economics to get their opinion before finalizing an investment.

To add on “Don't believe everything your insurance agent or investment advisor from the bank. Hear everything, do your homework and then finalize the investment”

4. How would I like to invest? – One time or Periodic Intervals?

This is not a very important consideration but nonetheless a useful one. Usually stock market instruments are known to be comparatively safer if invested in regular intervals for ex: through SIP. So if you intend on investing in ELSS schemes a SIP would be a better option than a one time bulk investment.

To wrap up, we have thousands of investment options to save tax. If we plan our tax saving activity efficiently we will not only save tax but also save up a lot of money for our future.


Happy Tax Saving!!!

2 comments:

  1. Could you please add more information about how to save tax and tax saving ideas? Thanks in advance for the ideas on how to save tax..

    ReplyDelete

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