Tax Planning: How can you do comprehensive financial planning? (2024)

Tax planning is important, but it should always be a part of your comprehensive financial planning. Let us see how you can do comprehensive financial planning step-by-step. We will also see how you can choose tax-efficient financial products and save tax at every step in your financial planning journey.

Emergency fund

The first step towards financial planning is building and maintaining an emergency fund to tide over unexpected financial circ*mstances. These can include a medical emergency, job loss, a delay in salary, a salary cut, etc. The emergency fund should contain 3 to 6 months of expenses, depending on your circ*mstances.

Saving tax on interest earned: You can keep the emergency fund money in a bank savings account. The interest earned on a savings account is taxable. However, you can get a deduction from taxable income on the interest earned from a savings account under Section 80TTA. The maximum deduction allowed in a financial year is the interest earned or Rs. 10,000, whichever is lower.

Interest earned from savings accounts maintained with banks and post offices is eligible for deduction. If you are a senior citizen, you can avail of deduction under Section 80TTB.

Life insurance for family bread earners

It is important for all family bread earners to take life insurance as it is a financial backup for the family in the event of an untimely death. You should ideally take a term life insurance policy. It provides you with a higher cover amount at a low premium.

Saving tax on life insurance premium: The premium paid on a term life insurance policy is eligible for deduction from taxable income under Section 80C. The maximum deduction allowed in a financial year is the premium paid or Rs. 1,50,000, whichever is lower. You can pay the life insurance premium for availing a tax deduction for yourself, spouse, and children.

To avail of the tax benefit, the term life insurance policy should be held and premiums paid for at least 2 years. However, you should hold the insurance policy for the long term, usually till retirement or you achieve all financial goals.

Health insurance for all family members

While you take life insurance for yourself, it is equally important to take health insurance for all family members. Your employer may provide you with health insurance. However, it is better to take a personal health insurance policy for the entire family. Even a single hospitalisation event can burn a big financial hole in your pocket and push you behind by a couple of years in your financial planning journey.

Saving tax on health insurance premium: The premium on a health insurance policy is eligible for deduction from taxable income under Section 80D. The maximum deduction allowed in a financial year is the premium paid or Rs. 25,000, whichever is lower. The premium can be paid for self, spouse, and dependent children. If you or your spouse is/are a senior citizen(s), the maximum deduction allowed is Rs. 50,000.

You can avail of a separate deduction for the health insurance premium paid for parents. The maximum deduction allowed in a financial year is the premium paid or Rs. 25,000, whichever is lower. If one or both parents is/are senior citizen(s), the maximum deduction allowed is Rs. 50,000.

To avail of a deduction on the health insurance premium, it should be paid in any mode other than cash.

The deduction can also be availed for a preventive health checkup for self and family. The maximum deduction allowed in a financial year is the amount paid or Rs. 5,000, whichever is lower. The deduction for preventive health checkups is a part of the overall deduction allowed for the health insurance premium under Section 80D.

Investing towards financial goals

Now that your emergency fund, life and health insurance are taken care of, the next step in financial planning is to invest for your financial goals. Some of these include a fund for a child’s higher education and marriage, a fund for one's own and spouse’s retirement, an annual family vacation, buying a car, a fund for starting a business, etc.

While investing towards your financial goals, you should follow appropriate asset allocation. It includes diversifying your investment portfolio into various asset classes like equity mutual funds, fixed income, gold, etc.

Saving tax on equity mutual funds: For the equity component of your investment portfolio, you can consider investing in an equity-linked savings scheme (ELSS). It qualifies for deduction from taxable income under Section 80C. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower. It is recommended that you invest through a systematic investment plan (SIP) route rather than a lumpsum amount. ELSS has a lock-in period of three years.

By investing in equities, you can benefit from the power of compounding. Equities carry high risk as stock markets can be volatile in the short term. However, in the long term, they have the potential to give inflation-beating high returns and create wealth for you.

Saving tax on fixed income: For the fixed-income part of your investment portfolio, you can invest in financial products like Employee Provident Fund (EPF) provided by your employer, Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year tax saving bank fixed deposit, etc.

All these financial products qualify for a deduction from taxable income under Section 80C. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower. You can read about the features of individual products like minimum and maximum investment limits, liquidity, lock-in period, tenure, tax treatment at the time of maturity, etc.

Home loan repayment

A dream home is something that most people aspire to buy. To make it easier for you to fulfil your dream, banks offer home loans at low interest rates compared to other loans. The Government does its bit by providing income tax benefits on home loans.

Tax saving on home loan EMI payment: The principal part of the EMI payment is eligible for a deduction from taxable income under Section 80C. The maximum deduction allowed in a financial year is the amount paid or Rs. 1,50,000, whichever is lower. Similarly, the interest part of the EMI is eligible for a deduction from taxable income under Section 24. The maximum deduction allowed in a financial year is the amount paid or Rs. 2,00,000, whichever is lower.

Financial planning is the key to achieving financial goals and tax planning can provide a boost.

We have discussed the various steps involved in the comprehensive financial planning process. When we follow each step systematically, we can be sure of fulfilling our financial goals. While working towards each financial goal, we can choose financial products for investment that provide tax deductions. By doing that, we can achieve our financial goals, along with maximising tax savings on the way. Thus, financial planning is the key to achieving financial goals, and tax planning can provide the much-needed boost to achieve them.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.

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Published: 10 Mar 2024, 12:45 PM IST