Tax planning

Come March, all will march towards our consultants to reduce our tax liabilities. Though we know that this is the same case, every year, we will start our planning only during the last month of the year or the last month the employer !

Here are some thoughts on saving some money from tax:

a. Do not invest for the sake of saving tax. For example, you invest Rs.100 to save Rs.30 (average tax rate taken at 30%). But the investments having the tax benefits are all long term in nature. So your Rs.100 is locked atleast for 3 years (if not 5 years). So your Rs.100 would be earning around 8% (max). If you want you can pay tax Rs.30 and have the balance Rs.70 at your disposal. If you are smarter, you can earn more on the Rs.70 at your disposal. So have a mix of tax saving and cash at hand for some real good investment. You can also look at closing some high interest paying loans (personal loans, housing loans) with the Rs.70.

b. Do not go for housing loan just for the tax benefits. Leveraging through Debt is recommended, but in these markets, having too much debt is not desirable. I have seen people buying house to save on tax. If you can rent a house, you are better off. For getting a benefit of Rs.45,000 (30% saving on Rs.150,000) you pay interest of Rs.150,000. Why do you need to pay Rs.150,000 to get Rs.45,000? If you dont pay, you are better off with Rs.150,000 in your hand!

c. If you have made and money (short term) in the stock market, it is better to save tax now. How? Your short term Capital Gain from Shares are taxed at 15%. With the share prices going south wards, I would suggest selling the shares, which you have bought less than a year ago, at the current prices and book losses. The short term Capital Loss (STCL) can be adjusted against the Short Term Capital Gains (STCG). So, your taxable portion of the STCG is reduced and your taxability also come down. I will explain with an example:
I have made Rs.10,000 STCG. I hold 200 shares of X Ltd (bought at Rs.100 and current market price is I have a loss of Rs.60 per share). I know the market price of X Ltd is keep falling. I sell the 200 shares @ Rs.40 and book a loss of Rs.12,000 (200 shares X Rs.60). I get Rs.8,000 in my hand as my sale proceeds (200 shares X Rs.40). Now my STCG of Rs.10,000 is adjusted against the STCL of Rs.12,000. So, I need not pay any tax, as my STCL is more and there is no STCG. Also, I can carry over the excess loss of Rs.2,000 over the next 8 years and adjust against STCG. What is so great about this? Here comes the interesting part. When the market goes down further and the share price of X Ltd goes down to Rs.35, you again buy 200 nos. You now got your 200 shares of X Ltd (your position remains same as far as the share holding is concerned). You have saved Rs.1500 (15% of Rs.10,000 STCG) and also carrying over Rs..2,000 to adjust in future years STCG. If you are smart and can predict the market, this is the best way to avoid STCG.

Whatever tax planning you do, please do keep in mind to maintain some liquid assets (like Cash, FD etc.,) to meet emergencies and also to grab some real good investments (like real estate). If you do not maintain liquid money, it may turn out that you may loose an opportunity of your life time. Also, maintain a long-term portfolio like Land, Gold etc, which can give a better return than any other product.

Consult your advisors, auditors before taking any decisions. In today's marktet you may get carried away by the marketing gimmicks by Insurance. Mutual Fund advertisements. So, be careful.

I came across a good article on Questions & Answers relating to tax benefits. The link is HERE (

Good Luck and happy investments.



Raghavan said...

Useful tips! thanks

Bala on Mar 9, 2009, 10:30:00 AM said...

Excellent article.

Thanks for mentioning the link to our web site, Gopal !!


Madhu on Feb 11, 2010, 12:24:00 PM said...

I always thought Equity gave the best returns !
Not sure if Gold is better that Equity...

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