It was over a month ago that Priya’s office had asked her to submit the proof of investments for claiming tax deduction. As is typical of so many working professionals, she hadn’t done anything about it till the last minute. Then on the last day, under pressure of the deadline, based on the suggestions of an equally clueless colleague, she hurriedly wrote out a cheque. She didn’t know what she was putting her money into. All that she cared about was serving her immediate purpose. So she handed over the cheque to the beady-eyed agent who had been conveniently hanging around office all of last month. Which agent? She hadn’t a clue.

Sounds familiar? Then this article is for you.

Earning a living is no walk in the park, what with trying to keep the nose to the grindstone, shoulders to the wheel, eye on the ball and ears to the ground. One rarely has the time, energy and inclination to worry about when, where and how to invest. Plus, this tax saving thing is so tedious and boring. Some money ‘has’ to be invested to get you a tax deduction. Bottom line—less TDS [tax deduction at source] and more income for the rest of the year. That’s all Priya was concerned with, then why bother with the planning and details, right? Wrong.

Because the cheque written today has got enormous ramifications on your finances tomorrow. So you better know what you are doing.

Make the effort

Assuming you are serious about your job, you must be spending the better part of your day giving it your blood, sweat and tears. In return, you are paid a salary. Even for the self-employed, it is no different. This income helps you to spend and save money for the future. So just because something seems tedious and boring, it shouldn’t be used as an excuse to be careless about money. Especially when it is neither tedious nor boring, but actually simple and straightforward. And the ten minutes that you spend reading this article is all it really takes. So do make the effort and it will pay you rich dividends—pun intended.

Understand the basics

First of all, let’s understand that the maximum amount of tax deduction allowed is Rs 1,00,000. Out of this, take out the total amount of provident fund [PF] deducted from your salary during the year. Of course, for the self-employed, this figure would be nil. Those who have taken a housing loan should also reduce the principal portion of the EMI [equated monthly installment]. Now the balance left needs to be invested.

For example in Priya’s case, the PF was Rs 60,000 for the year and she lived with her parents. So she needed to invest Rs 40,000 [Rs 1,00,000 – Rs 60,000] more to reach the limit. Now, she can invest this Rs 40,000 in a variety of instruments such as bank deposits, life insurance, NSC, PPF, ELSS [tax saving mutual funds] and Post Office deposits. Space constraints preclude a detailed discussion of the pros and cons of each one of these instruments. So, I will spare you the ‘tedium’ and ‘boredom’ and directly get to the point.

Simply invest

Instead of depending upon your colleague, ignore everything else and simply invest in a combination of ELSS and PPF. If you are relatively young and just starting out, put 70 per cent into ELSS and 30 per cent into PPF. As you advance, lower the proportion in ELSS funds and increase the proportion of PPF eventually reaching a 30 per cent ELSS and 70 per cent PPF combination. Of course, since each person’s situation is different, taking the advice of a financial planner [as against an agent] would be better than this kind of template investing—however, it would beat the last minute frenzy any day.

Now that the tax saving is taken care of, lets go a step ahead. Beyond a point tax saving is simply not possible. So don’t fret about saving tax, worry about optimising post tax income. How do you do it?

Perhaps by making a small modification to the usual mindset. Normally, the amount we save out of our incomes is what we call savings. In other words, Income minus Expenses equals to Savings. Now, for the almost presumptuous suggestion. How about Income minus Savings equals to Expenses? It’s the same equation, but redrawing it is infinitely more efficient as far as our finances are concerned.

Start small

So starting next month, pre-decide how much you want to save out of your income and the balancing figure should automatically make up your expenses. Take care not to set too ambitious a target, or you will end up just strait-jacketing yourself and give up soon. So start small and make the adjustments as you go along. This strategy introduces an element of financial discipline and ensures that you don’t feel too much of a pinch.

Be an early bird

This holds good for anyone with an income. You need not wait till the last minute and take decisions in a hurry. The early bird gets the worm. You can be that early bird by investing in tax-saving avenues at the very beginning of the financial year, even on April 1. Doing so has a two fold advantage. Firstly, your tax saving investments will earn returns from the beginning of the financial year [April-March]. Secondly, you will not have to worry about paying a lump sum [which you may not have] at one go at the last minute.

There is no compulsion to invest for tax only towards the end of the year. A much more efficient strategy is to invest throughout the year in a staggered manner such that by the time the financial year comes to an end, you can take full advantage of the tax saving opportunity. And don’t worry about how much or little you save each month. As Benjamin Franklin has so succinctly put, “A penny saved is a dollar earned!”

This was first published in the January 2009 issue of Complete Wellbeing

Sandeep Shanbhag
Sandeep Shanbhag, a Mumbai-based Chartered Accountant and Director of Wonderland Consultants, a tax and investment advisory firm in the business for over 20 years. He writes regular columns on investment and tax planning in newspapers and websites such as DNA, and


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