Tax Planning

CA. Chetan V. Oswal

 F.C.A., C.F.P

Benjamin Franklin said, "The only things certain in life are death and taxes.

We fear them both. While we don't have solution for earlier, we can fight against the fear of later.

What is Tax Planning ?

Tax planning is an essential part of your financial planning. The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals.

Myths about tax planning:

  •  Tax planning results into tax evasion and it is wrong:
Tax Planning involves sensible planning of your income sources and investments. Tax planning is done well within the framework of the law and the government actually encourages you to plan your taxes.
  •  Tax planning is all about investing in 80C:
Majority of Tax Planning is done by putting money blindly into any 80C product. Investment instrument should be chosen taking into consideration ones' financial goals and risk profile.
  •  Tax Planning is complex and difficult:
Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances

Mistake we do in tax planning:

One of the biggest mistakes that people make is that they invest to save tax. The right approach is to Invest for achieving your financial goals and at the same time keep the tax angle in mind.

Do not make last minute decisions just because your payroll department has reminded you that the internal deadline for submitting proofs is approaching. Tax planning involves planning in advance to avoid the last minute scramble. Last minute decision generally ends up in choosing wrong product not suitable for you or product not required for your financial goal.
Do not blindly invest money with the first agent that you might come across. You might end up making mistakes. A lot of people end up buying insurance policies with minimal insurance coverage or putting money in instruments where they cannot access the money when they need it. 

Selecting tax saving investments

You should think about the following criteria, before selecting your tax saving investments for the year:

  • Liquidity:
  • How quickly will you need the money? None of the instruments let you withdraw your money quickly, in fact there is a minimum three year lock in for all tax saving investments.
  • Risk and Return:
  • Risk and reward are inversely proportionate. That means the instruments with lowest risk give lower returns and vice-versa. One has to study his own Risk Profile before selecting on any of the instrument.
  • Inflation protection:
  • The instruments that give you a low return typically are the worst type of investments regarding inflation. This is important because many of the instruments give you a fixed rate of interest, and lock in your money for a long period. This is not a good protection against inflation.
  • Tax Exemption:
  • All tax saving investments under Section 80C are alike in one respect that they are tax exempt when they are invested. But they differ with respect to the tax on the income you earn from such an investment as well as the tax on the maturity of the investment.

While it is true that tax planning is a critical activity, a financial decision to buy a house or make an investment should not be motivated by tax saving. It is the financial plan that should tell you what to do with your money, but within the options, you should choose the most tax efficient one to get the best benefits

Funny Quotes about tax


"The hardest thing in the world to understand is the income tax." -- attributed to Albert Einstein "Optimist: Someone who sets aside two hours to do his income tax return." – Unknown "Income tax returns are the most imaginative fiction being written today." -- Herman Wouk "The way taxes are, you might as well marry for love." -- Joe E. Lewis "The income tax has made more liars out of the American people than golf has." -- Will Rogers "The taxpayer -- that's someone who works for the government but doesn't have to take the civil service examination." -- Ronald Reagan "People who complain about taxes can be divided into two classes: men and women." – Unknown "The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it." -- Edward J. Gurney
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