Financial planning is not a one-off activity. It involves a lot of elements that come into play throughout the year. Most people fail to understand that the impact of a delay or keeping all the financial planning till the end of the year can cause either a direct financial hit or a loss of precious opportunities.
The entire financial planning process should begin in April, the start of the financial year. Changes announced in the Budget are usually applicable from April 1 unless specified. A lot of planning work especially to save taxes can be completed in the first week of April to give an investor a good array of benefits that they otherwise would not have enjoyed.
The overall plan for the tax saving investment should be ready in April to get a hang of the areas that must be targeted for investment. This becomes the base for all the action during the year. The first few days of the financial year are crucial for those who are looking to make use of their public provident fund account for their tax saving investment. If the investment is made before April 5, the interest on the amount invested will be available for the entire year. The benefit is available for the month if the money comes before the said date.
The maximum investment allowed in this instrument is just Rs 70,000 a year so there cannot be an investment before the start of the year when the balance of the previous year has been used up. Again the person gets tax benefit for the year in which the amount is invested. If the investment is being made by cheque then one must ensure that the cheque gets cleared before this date or the interest will be available on the additional invested amount from the next month.
In case an investor wants to invest in systematic investment plans for either an equity linked savings scheme or a pension plan of a mutual fund, adequate work has to be undertaken to ensure that the whole year is available for investment. The work has to start from structuring the first instalment in April itself so that the cycle continues. Once this begins, the remaining amounts will follow as per the instructions given to the fund.
Once the immediate work of getting things off the ground is completed, one should create and implement a structure for the entire tax saving investment for the year. The investment plan prepared earlier will have some areas for investment that will require a time chart while funds would have to be arranged for, for others. However there are areas that a person has little control over.
For example in case of an insurance policy the premium has to be paid annually so the time when the policy is taken in the first year determines the time when the premium payment will come up for the individual each year. Once the plan for the year is finalised, one can start allocating funds from available finances to different areas to ensure that money is available at the time of investment.
Scouting for opportunities
June is the time when investors are scouting for opportunities to utilise their investment. This is especially true on the debt side, where action starts heating up after April-May, giving the investor an opportunity to invest in the debt market.
For non-salaried people, advance tax payment is an area that they need to look into during this period. Starting from September, they will have to pay advance tax on their earnings in specified proportions each quarter. A sum kept aside for this purpose will avoid a toss up between investing and paying taxes.
It is essential to review your position on the tax front between October and December. The festival period or December-end is often a bonus time for certain sectors and hence the extent of bonus can shift income levels. This will call for a change in plans through a small change in the composition of investment or even some additional investment. An individual has to get ready to submit the proof of the tax saving investments, especially when they are salaried, between December and February.
The last quarter, especially February and March, is similar to the rush hour when all efforts have to be made to complete requirements. If there is some amount of investment that has been planned but not made then this is the time when serious efforts have to be made to complete it. This can be started from January itself.
One also needs to ensure that investments already made have the necessary proof for record keeping. This has to be submitted to the employer and for those who are self-employed this will be required at the time of filing tax returns if called for. There can be times when some amount still has to be invested in a short span of time. If such a situation does arise, one should ensure that investment at one go does not create a big timing risk. For example taking an insurance policy in the last week of March will create a liability for the amount for the next several years and this will impact the planning for the time ahead.
© HT Media
Note: This article has been written in view of the taxation rules for FY2008-09 applicable in India. The readers are advised to make their own judgment about the applicability and suitability of the information provided.