Was it only last year that you told yourself you would file your tax returns before the March 31 deadline? And didn't bother to practise what you preached? March 31, 2006, came and went. But you failed to file your tax returns.
Is the same story repeating itself this year? If it is, you better tighten your belt. Tax planning should not be the result of a knee-jerk reaction when the March 31 deadline is nearing.
In the months of February and March, we are flooded with queries regarding tax-saving funds. Come April and May, and that dwindles down to an odd question here and there. Which is why we want to talk to you about tax-saving mutual funds in the very first quarter of this financial year 2007-08.
Tax planning should form a strategic part of your entire financial plan.
The biggest mistake investors make is that they view their tax-planning avenues in isolation and think about it just once a year. When you decide how much of your money you need to allocate to fixed return and equity and how you should distribute your risk, tax saving instruments must be taken into account.
There are various reasons why we recommend tax saving funds, also referred to as Equity-Linked Saving Schemes (ELSS). One such reason is that their benefits are tremendous.
For one, they do not have any restrictions. If you choose to, you can invest the entire Rs 1 lakh available under Section 80C in these funds.
If you are young with no dependents (this means you are not paying life insurance premiums), not repaying any home loan EMIs (these repayments also get a Section 80C deduction) and prefer a higher exposure to equity, you could consider exhausting the entire limit of Rs 1 lakh available to you under Section 80C.
They give you the benefit of higher returns. You can get 8 per cent with your PPF and NSC. But if you can get a 50 per cent return, coupled with a tax benefit, why be stupid?
Secondly, if you hate blocking your money for years on end, then this one surely fits the bill. The lock-in period for ELSS funds is just three years. When you sell after three years, you pay no capital gains tax. So, you get the tax benefit when investing and you pay no tax on your profits.
But you have to play it smart. Choosing a right fund is critical. How you invest also makes a difference. This brings us to the issue of why we are talking about such funds now.
The best way to invest in a mutual fund is via a systematic investment plan. So you commit to putting away a fixed amount every month. This is an automatic savings habit that will hold you in good stead in the long run and help you ride the ups and downs of the stock market.
This year, volatility is a given in the market. You need to be consistent in your investments to do well. If you invest in one go, you will be at the mercy of the market.
Moral of the story: Start now.
Don't fall prey to the age-old habit of digging wells only when you feel thirsty.
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