Aligning Tax Planning With Financial Goals

As humans, we all have desires, which we want to fulfill, be it an expensive foreign trip or purchasing a luxury car, and to be honest, these cannot be fulfilled at the flick of a wand. Therefore, it becomes pertinent to align tax planning with your financial goals.

Many of us plan our taxes with the sole purpose of saving tax and subsequently saving “that extra money.” For instance, the premium paid on life and health insurance qualifies for tax benefits, this is the only reason why most of the policy-holders go for insurance. On the contrary, a minuscule minority focusses on financial goals at the time of planning for tax. Financial planners and wealth managers are unanimous on the fact that tax planning should be in sync with financial goals.

“If an individual’s aim is to create a corpus to meet his long-term goals, then the approach will be to invest in specific tax saving products. For instance, if a person’s financial goal is to accumulate a sizeable corpus of funds at the end of a specific tenure, he may invest in equity linked saving schemes or the national pension scheme (NPS),” explained Kusal Roy, MD, Tata Capital Financial Services.

We all have multiple goals like buying a home, children’s education, retirement funding, marriage and other function expenses for children, family and vacations. Suresh Sadagopan, Founder, Ladder7 Financial Advisories suggested, “The way we invest should be aligned with the goals we have in life, when they are coming up, our own risk profile, liquidity needs, regular income needs, and tax efficiency. Hence, any investment we make has to be aligned with these important parameters and not just tax saving alone. We can certainly invest in a manner where tax savings or tax efficiency is also factored in when choosing a product for investment. Tax planning should always be seen as a by product while investing and never the only reason to  consider investing.”

So, if you think you cannot sync tax planning with your financial goals then the best way to go about this is to consult an experienced professional, who can rightly guide you based on your specific need. Earning money and making savings out of it is the primary goal for every salaried class person. It is rare to come across a person who does not want money, almost everyone wants more of it, irrespective of whatever level of wealth one has accumulated.

Ashish Nasa, Head of Wealth Management, NRI and Relationship Banking at Equitas Small Finance Bank, explained that when you build wealth, every penny counts and it needs to be planned either by way of increasing source of income or savings or both. The objective is to increase the amount of money available at your disposal.

He added, it is important to optimise every source of funds inflow or outflow. “Tax Planning is an honest attempt to reduce your tax payments as much as possible. Lesser you pay taxes more money you can save for yourself. Hence tax planning is nothing else but saving money,” he said.

According to Jayesh Faria, Senior Executive Group Vice President, Motilal Oswal Private Wealth Management, tax planning is where you can avail any of the tax benefit by investing or reduce your tax liability through a particular investment product. “It is important to align tax planning with goals, so that it acts as a motivator for you to stay invested in that investment and also invest in a corpus keeping the goals in mind. Else one can get carried away by markets or any short term requirements,” he said.

However, he stated, majority of investments where there is tax benefit comes with a certain lock-in period when the money cannot be withdrawn. So, it is better to plan investment decisions accordingly. For example, PPF comes with 15 years lock-in, so people can invest by aligning either of the long-term goals like children’s education or retirement corpus through this investment. Equity linked savings scheme of mutual fund comes with three years lock-in so one can plan for their short-term goal of buying a car through these investments.

Roy says equity linked savings schemes, which offer exposure to pure equity, are great investments to make for financial goals ranging from five to seven-year period. If an individual is looking for a low risk and volatility portfolio, he can opt for tax saving investments like PPF and NSC where the interest is automatically cumulated. He added, “Important financial goals that an investor should keep in mind depend on the age and stage of life that the investor is at the moment. For a young investor, a healthy ratio between savings and expenses will be an important goal whereas a more matured investor may have other aspirations like investing in a new home, child’s education and marriage or early retirement planning.”

Tax planning must not be confused with tax evasion. According to Nasa, tax planning is about using honest and genuine ways to reduce taxes with full transparency about methods adopted and sources of wealth. In an emerging country like India, tax laws evolve over-time. “If we take example of recent two to three years, there have been many changes in tax rates applicable for various investments. From investment maturity value perspective, these changes have created impact on the initial calculations made by the investors,” he said.

Nasa further classified financial goals into the following categories:

1 Consumption Oriented Financial Goals: where the primary objective is to buy a luxury product or experience like car, world tour, holiday abroad, international cruise

2  Safety Oriented Financial Goals: where the primary objective is to ensure financial security of self, family members like child education, first house, retirement corpus and child’s marriage.

3  Investment Oriented Financial Goals: where the primary objective is to increase the amount of wealth at disposal, post achieving financial security like second or additional house, long- term wealth corpus.

On a concluding note, it can be stated that although the choice and priority of financial goals is individual centric, one can surely take the help of a financial advisor in case of difficulty.

ashfaque@outlookindia.com