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Create Wealth the Contrarian Way: Optimizing on Tax! By Anil Rego | Y! Money – Fri, Jan 6, 2012 5:06 PM IST 2 Email  Print  Tax planning is often a ritual that people do not give too much importance and is at best considered a necessary evil. More often than not, for individuals, financial planning itself begins and ends with tax planning. The fact however is that tax planning is the first and a very important step towards financial planning. Suitability Analysis Today, tax-saving avenues' offer a good range of investment opportunities with different levels of risk, return and liquidity. Choose an appropriate mix of investment s keeping in mind your financial objectives. Most of the time, we either take excessive risk or too less risk. Do not get carried away by past data, for eg. when markets are at a high and about to fall, equities will give you the best track record. On the contrary, when interest rates are at a peak, it is the best time to look at fixed income investment avenues and lock-in the interest rates for the long haul. Given the current condition of the markets, both equity and debt pose a fine opportunity to balance investments . Interest rates are at a peak and it may be appropriate to choose your bank deposits with 5 year lock in which will also provide you with tax benefit. At the same time, global cues have  weakened the equities and most of the investment s within this arena are available at lucrative  valuations. If you already hold ELSS funds, it may be the right time to average your holding. Often, in the last minute frenzy of saving taxes, one dumps all their monies in one single avenue. Do take a planned and well-informed call. It is recommended to use a combination of investments and have an appropriate asset allocation, based on your risk appetite. Also keep in mind the tax you need to pay on the returns from the tax saving investments that you choose. Tax saving without investing! This is true contrarian style; where you squeeze benefits without any penny going out of your pocket and even better, when you squeeze benefits out of expenses.

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Create Wealth the Contrarian Way: Optimizing onTax!By Anil Rego | Y! Money – Fri, Jan 6, 2012 5:06 PM IST

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Tax planning is often a ritual that people do not give too much importance and is at best considered a

necessary evil. More often than not, for individuals, financial planning itself begins and ends with tax

planning. The fact however is that tax planning is the first and a very important step towards

financial planning.

Suitability Analysis

Today, tax-saving avenues' offer a good range of investment opportunities with different levels of 

risk, return and liquidity. Choose an appropriate mix of investments keeping in mind your financial

objectives. Most of the time, we either take excessive risk or too less risk. Do not get carried away by 

past data, for eg. when markets are at a high and about to fall, equities will give you the best track 

record. On the contrary, when interest rates are at a peak, it is the best time to look at fixed income

investment avenues and lock-in the interest rates for the long haul.

Given the current condition of the markets, both equity and debt pose a fine opportunity to balance

investments. Interest rates are at a peak and it may be appropriate to choose your bank deposits with

5 year lock in which will also provide you with tax benefit. At the same time, global cues have

 weakened the equities and most of the investments within this arena are available at lucrative

 valuations. If you already hold ELSS funds, it may be the right time to average your holding.

Often, in the last minute frenzy of saving taxes, one dumps all their monies in one single avenue. Do

take a planned and well-informed call. It is recommended to use a combination of investments and

have an appropriate asset allocation, based on your risk appetite. Also keep in mind the tax you need

to pay on the returns from the tax saving investments that you choose.

Tax saving without investing!

This is true contrarian style; where you squeeze benefits without any penny going out of your pocket

and even better, when you squeeze benefits out of expenses.

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1. Exemptions/Reimbursements

First, one needs to look at the reimbursements that are available from the company and take

maximum advantage of the same. Normal expenses that one incurs could help save tax. Some

examples for the same would be Telephone / Fuel Reimbursements, Meal Vouchers, Company Car,

etc. Provisions for these could differ from company to company. A person in the lower tax slabs can

sometimes reduce one's tax liability to nil with exemptions alone!

EXEMPTIONS

House Rent Allowance

Minimum of :1. Actual HRA

2. Rent Paid - 10% of Basic

3. 40% of Basic (Non-Metros) or 50% of Basic (Metros)

Conveyance Allowance Rs. 800 / Month

Leave Travel Allowance

2 trips in a block of 4 Yrs

Amount not exceeding Air Economy or Rail AC I

Fare shall be for shortest distance and for a single destination

Medical Reimbursement  Rs. 15,000 / Annum

2. Deductions

There are several deductions available. Section 80C allows a maximum limit of Rs. One Lakh across

investments ranging from — Provident Fund (including Public PF), Infrastructure Bonds, Fixed

Deposits (>= 5 Yrs), NSC, Insurance / Pension Plan, Unit Linked Insurance (ULIP), Equity Linked

Savings Scheme (ELSS), etc. It also includes tuition fees of children and also the repayment of 

principal on housing loan.

In addition, Infrastructure bonds worth Rs. 20k / annum is allowed for tax benefit u/s 80CCF.

Infact, given the interest rate levels, this seems to be a lucrative investment avenue. Whilst investing

in infrastructure bonds, it is pertinent to look at the rating, a 'AA+' and above is considered safe for

investing. You would also have the option of choosing annual payout of interest or cumulative, here

again you can choose the one that suits you best. These are typically launched during the fag end of 

the financial year and the window to subscribe is open for a brief period ranging from 15 days to a

month.

Medical premiums up to a maximum of Rs 15,000 qualifies for deduction. One can claim an

additional Rs 20,000 for parents (senior citizens).

3. Home Loan benefits

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There is one more reason to buy a house — the tax benefits on your home loan, but remember, this

should definitely not be the sole reason. The EMI that you pay towards such home loan has two

components — Interest and Principal repayment. We have seen that principal will qualify under

Section 80C among other investment avenues. The interest component provides a separate

deduction and has a limit of Rs. 1.5 lakh for a self-occupied property.

 As we welcome the New Year, let us vow to plan better and choose the contrarian way to create

 wealth and optimize on taxes - and not get caught in the last minute frenzy of tax planning!

Tips for the week 

• Understand your long-term financial goals — this is the starting point.

• Start early so that you can do an effective financial plan, along with tax savings. This also

gives you time to carefully evaluate various investment avenues.

• Some tax savings do not require you to invest — take full advantage of them.

• Hedge your Health / Life Risks.

•  You can claim a separate deduction for medical premium of your parents.

• Take an informed decision, understand various nuances of investment avenues such as the

time frame for contributions and also the lock-in period for investments.

• If you find it difficult to manage enough money for tax saving investments every single time,

use shorter-term products, so that maturity value can be used to save tax subsequently.

The author Mr. Anil Rego is the CEO and founder of Right Horizons, a leading end-to-end Investment Advisory and Wealth Management firm that focuses on providing

financial solutions that is specific to customer needs.