My 45-year-old client was full of beans as he returned from his club, where a guest speaker had given a talk on the health benefits of jogging. My client—I’ll call him Sharma—was well- to-do, but he’d neglected his health. Today he’d finally seen the light.
Up early the next day, Sharma set out to run. By the time he returned home exhausted, he’d done over three kilometres! His heart raced, and he felt giddy, unfit and achy. That day the man who’d walked to become healthier stayed at home—he was sick.
What Sharma experienced with sudden physical exercise is what most people do with fiscal exercises by the end of March, when the financial year (FY) draws to a close.
Every year, by that time, my office gets calls from another of my clients, an employed lady who asks, “Can you please send me application forms for my tax-saving investments? Tomorrow is the last day, after which they’ll deduct a huge amount in taxes!” Why do most people invest in tax-saving instruments only in March? Because they magically become richer in that month? And do most Indians die just after March?
From the behaviour of the large majority, the answer to these questions would seem to be yes, because that’s the only time when an overwhelming majority of people make tax-saving investments and buy life insurance.
But think again.
If you’re one of them, then saving tax is clearly your first priority—not the investment you make that should boost your net worth, or the life insurance you take that should protect your family. Poor financial literacy!
Such knee-jerk investing practices do not help us save money appropriately. You must aim, instead, at pursuing tax-saving investments slowly and in a systematic manner over the entire FY, and not scramble in at the last moment.
So let’s get it right. There are three things to consider: Your financial goals, investment strategy, and the choice of tax-saving transactions.
All three are important. You must try and align them, if you want to maximize your savings and optimize taxes. There’s my cycle-rickshaw analogy. The rickshaw’s front wheel gives direction to the vehicle—achieving your financial goals. Although the rickshawalla sits up front, his pedalling drives the two rear wheels, which represent investments and tax saving. To reach his destination, he has to pedal as well as give it front-end direction.
Financial Goals. Our financial goals comprise those responsibilities and aspirations for which we need to save and invest our hard-earned money. These include health, housing, children’s education and marriage, travel, vehicles, hobbies, property, wealth targets, charity, retirement plans. Since I know that most people never take the trouble to list these, I make my clients do that important exercise. If it’s a couple, the husband and the wife are given separate sheets of paper and asked to list their future financial responsibilities, wants and dreams. More often than not, their lists don’t match, since they’ve never discussed those things before.
If that sounds just like you, do it now—or else, you’ll be earning and saving all your life, but without knowing or deciding what you’re saving for.
Investment strategy. In the absence of financial goals, investors tend—dangerously—to focus on market conditions. If the stock market shoots up, you buy shares. When gold prices soar, you buy gold. So with property. Thus, over time, your approach to investment gets aligned to market conditions, and not to your own financial goals. You may not benefit much by following the herd.
Choices for tax-saving. When financial goals are not defined, your tax saving exercise will also not be in sync with your life goals. Since tax-saving transactions are often treated as a mandatory financial-year-end exercise, I’ve learnt that most people are not even aware of the actual tax benefits they derive from buying them all of a sudden.
Tax laws are friendly. They’re so friendly in fact that you may happily invest or save primarily with your goals in mind.
Nobody enjoys paying income tax. But the broad philosophy is that citizens who earn enough must pay taxes honestly, because we use roads, parks and bridges—and the “best things in life that are free,” all of which we tend to take for granted. We enjoy the protection provided by our armed forces, the police and the courts, the services of so many people in public life, all surviving on tax money. (If you find fault, imagine life without all these and you’ll understand.)
I said tax laws are friendly because we are given benefits—subject to some limits in most cases—when we spend on practically all our major financial responsibilities. So it’s wiser to give the responsibility priority, not the tax-saving part.
Take health and life insurance. As Sharma learnt at his club that day, good health is our biggest wealth. But most of us take it for granted. “We live a healthy life, exercise daily and eat natural food,” another of my clients told me. “No one at home has been hospitalized. So why should I pay for health insurance?” “You can never tell when—,” I tried to explain. “No, we don’t need it,” my client interrupted adamantly. Standard argument, I thought, and so I tried the tax bait, since there’s a tax benefit on the health insurance premiums that you pay for yourself, your spouse, children and dependent parents. “You have a choice,” I said. “Either you pay a health insurance premium or pay tax.” It worked—and my client’s family got health cover. The tax benefit was secondary, as far as I was concerned.
The unfortunate death of a family’s breadwinner means both emotional and financial loss. You’ll have to deal with the emotional loss, but it helps immensely if life insurance taken by the deceased covered the financial loss. Premium paid towards life insurance (ask for Term life insurance for the best cover at the lowest premiums) is also deductible from your taxable income.
Or take housing. There are tax deductions on the rent you pay, and on the interest and the repaid principal on housing loans.
Education too. Expense incurred as tuition fees on any two of your children is exempt from tax. So is interest paid on educational loans for studies beyond the 10th standard.
Saving for retirement. Will the wealth you create outlive you, or will you outlive your wealth? Since the wealth must outlive you, it’s vital that you provide for your twilight years—and, with today’s improved health care, those years could be long. There are schemes like the Employee Provident Fund, Public Provident Fund, equity-linked saving schemes (ELSS) of mutual funds, and insurance-linked long-term saving schemes. All these can also save you taxes.
Even after you retire and you put your savings in schemes that give you regular income—senior citizen saving schemes, annuities or monthly income plans—you continue to get tax benefits.
As I tell my clients, follow your life goals all year round—buy insurance, save in ELSS, send the kids to college, take a home loan if you need one, invest in FDs. Do whatever, keeping those goals in mind. Treat the tax you save on all these as a nice bonus, and not the other way around.
My 45-year-old client was full of beans as he returned from his club, where a guest speaker had given a talk on the health benefits of jogging. My client—I’ll call him Sharma—was well- to-do, but he’d neglected his health. Today he’d finally seen the light. 
