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Monday, December 3, 2012

Start planning your taxes early in the yr

This will help you spread the tax burden over several months and provide better returns on non-taxable savings


    In a few weeks, a new year would be upon us, bringing along with celebrations the muchbothered aspect of meeting the tax burden for the fiscal that will end on March 31. And this is not a one-off concern, but returns every year around this time. So it is better to have a few things in mind that would help us sail through the tax conundrum easily, year after year. 
First, all investors who pay taxes should understand the advantage of starting early. A large number of taxpayers jump to plan their tax-related investments only during the January-February-March (JFM). But if you start taking care of tax outgoes from the very beginning of the fiscal, your investments would also start earning interest for some extra months. And if you put together this extra interest income for several years, you eventually end up with a handsome corpus. Also, starting early means you spread your tax burden over a longer period of time instead of just over two-three months or, at times, over just one month. Besides, investing early at the beginning of the next fiscal would mean that your holdings in shares and bonds would qualify as long-term investments and enjoy tax sops. If your investments in several other asset classes are more than three years old, you are entitled to indexation benefit, which would reduce your tax burden. Here are a few tax-related issues that you should keep in mind for a better experience with your investments, to lighten your tax burden and also for better 
long-term returns from your portfolio. 
Count your taxes before you sell 
Calculate the tax burden when you are selling part of your holding that was bought less than a year ago. If you sell some shares within a year of purchase and you have made some gains on them (called short-term capital gains), you end up paying tax on the returns at the same rate that you pay your income tax. So, you should account for the tax outgo before selling. On the other hand, if you have posted short-term capital loss, you can set it off against short-term gains. 

    The article by Maran G gives an indepth idea about the psychological aspect of how investors sell out their winners but hold on to losers, and the relative tax issues when you sell the losers and the winners within one year of their purchase. 
Know the difference 
According to Vidya Bala, head, mutual fund research, FundsIndia, every investor should know the difference between expenses which are tax-deductible and investments which allow deductions from overall tax burden. "If you are a salaried person, you may 
have claimed deduction on 
your home loan or children's education or medical expenses. But remember, a good part of these are expenses, and not investments. These are not going to help you build a kitty," Bala said. "Take maximum advantage of the investment options available for deduction under Section 80C of the Income Tax act," she said. 
Amplify returns 
Another important aspect, according to Bala, is that you should always aim at amplifying your returns. "Tax benefits available on the capital you invest can significantly change the yield of investments that look unattractive at first notice. Take the case of the humble small savings scheme, National Savings Certificate (NSC). A five-year NSC with current interest rate of 8.6% will generate a yield of 16.2% if you are in the 30% tax bracket. The cash outflow saved in the first year helps jack up overall returns," Bala said. 
Look at non-tax saving instruments 
Last, but not the least, in your zest to save taxes you may aim at tax-saving instruments, but that should not deter you from looking at investments which can give you better returns over the long term. For example, equitylinked savings plans from mutual funds may give you better returns over the long term (see article by Dhiraj Mittal), but there are other mutual fund schemes too which can give you better returns and also give a better balance to your overall portfolio. 

TAX TAKE 
äStart early with your tax plan 
äMind the long-term and short-term gains and losses 
äKnow the difference between taxdeductible expenses and investments 
äAim to amplify your returns 
äLook at investments other than tax-saving ones




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