Investors fail to plan and structure their investments and taxes optimally, not because of negligence or a lack of inclination. It is more to do with the fact that one's work keeps oneself so busy and preoccupied that financial planning becomes an exercise that is forever postponed to next week. Then before you blink, March arrives. Some last minute, convenient tax-saving investments are done and a solemn resolution is made that next year is going to be different.

Well, next year is indeed here and its time to act upon your resolution. The trick is to start early and take the necessary action step by step. Financial planning is at all times a process and not a one time, sporadic exercise. (See also the accompanying piece, Tax Planning: Incidental, not an end by Ranjit Mudholkar).

Don't be scared of EET: Invest now
The government has announced that it would be moving towards an EET-based tax system. To cut the jargon, Sec. 80C investments (like PPF, Life Insurance, NSC, ELSS), hitherto exempt, could be made taxable upon maturity. Though this has not happened till now, one can never say when the authorities will bring in the new tax laws.

The only way to get around this for the current year is to invest NOW! The tax whenever it is introduced, cannot be applicable with retrospective effect - which means investments already made are out of the tax net! The long and the short of it? Don't wait till March 31, 2006 for making your tax saving investments.

Old Sec. 88 imposed individual sub-limits on instruments. For example, you could only invest Rs.10,000 under ELSS, or the limit for housing loan repayment was only up to Rs.20,000. Such individual limits are no longer applicable and one can exhaust the full amount of Rs.1 lakh offered under Sec. 80C in any avenue of choice. The only thing to note here is that PPF rules have been left unchanged and hence any contribution in an individual PPF account cannot exceed Rs.70,000 in the year.

Again, here if you want to take advantage of the equity markets, you can invest the full Rs. 1 lakh in ELSS funds. True, if one waits a while for the markets to cool off, then one would be able to invest at lower levels. However, as explained above, if by then the new tax law comes into force, then withdrawals could become taxable. Hence, it is a toss up between investing now and availing of tax-free maturity or waiting a while and risking the EET law.

Old Shares
Almost all investors have shares in their portfolio (possibly inherited) of which the details as regards cost etc. are not available. Well, take advantage of the tax regime. As almost all of such shares would be long-term in nature, you will not incur any tax when you sell the shares. Even if you originally intended to hold on to these for the long-term, it's a better idea to sell and buy the same again! Surprised? This is how it works.As of now, long-term gains on equity are tax-free. One doesn't know how long this will last.

Wait, before you read between the lines. We are not suggesting for a moment that the government is thinking of bringing back the tax on equity. All we are proposing is that tax regimes and benefits change from time and time, and right now make hay while the sun shines. As it is, you don't know the cost of the shares. The markets are at high levels. Substitute the unknown cost by the current market price by selling tax-free and reacquiring. This way, if and when you sell in the future and at that time if capital gains tax has been made applicable, the current market price will serve as your cost of acquisition, thereby lowering your net capital gains.

Are you an investor or are you a trader?
If you trade, then your profits from the stock market would be taxed as Trading Income. Capital gains exemption won't be available. However, you can set-off the STT paid against the tax on your trading profits. Also, if you have leveraged your trades, you can set-off the interest against your income. And lastly, if you have made any losses, then the same can be off-set against your profits. Take care to use these tax benefits before arriving at your net taxable income.

Construct multiple tax files
Its also a very good idea to make tax files in the names of non-earning members in your family. Say you have parents who don't have taxable income. Then, you can give them a gift of a sum of money which they can invest in fixed income earning avenues and earn tax-free income! Yes, tax-free income even when there is no avenue left that yields tax-free interest! It works this way.

Say your mother is over 60 years old. She doesn't have taxable income and does not file tax returns. You can give her a gift of up to around Rs. 21.25 lakhs. Note that we use the word "up to", which means that the strategy will work even with lesser gifted amounts. Now, out of Rs. 21.25 lakhs, she invests Rs. 15 lakhs in Senior Citizens Savings Scheme (SCSS) that yields 9% p.a. fully taxable. This works out to Rs. 1,35,000. The remaining Rs. 6.25 lakhs she invests in 8% taxable Savings Bonds thereby earning Rs. 50,000. Her total income consequently works out to Rs. 1,85,000 (Rs. 1.35 lakh + Rs. 50,000). The tax threshold for senior citizens is Rs. 1,85,000 and therefore she would not be liable to pay any tax.

In other words, as a family, you have earned Rs.1,85,000 tax-free, just on account of gifting the funds to your mother rather than investing it in your name. Note that had you invested in your name, you would have had to pay tax at the highest rate. Also the 9% rate applicable to SCSS would not be available to you!

You can work out similar tax files in the name of your major children who may be studying and not having any income currently.

Last but not the least Invest in equities but systematically
A market that took all of thirteen long years to move from 4000 levels to 7000 has scaled the next 2500 odd points in around six months time. Though this is good news, the sobering thought here is that this pace cannot be maintained. They say, when money pours in, fundamentals are brushed aside - which is precisely what is happening in the market today. One is worried that it could be a "Too much - Too soon" kind of a phenomenon.

In fact, the annualized growth rate from 7000 to 9000 points works out to over 150%. Clearly this growth rate cannot be sustained. However, this doesn't mean that you should rule out equities altogether. Take the SIP route.

Consider the table below. What the investor has done is that he has invested Rs. 12,000 in all. However, this he has done by investing Rs.1,000 every month for 12 months. In the thirteenth month he withdraws his investment which has grown to Rs. 14,000. Though it doesn't seem significant, the rate of return works out to an outstanding 32% annualized.

Moving from equity to debt seems a good idea, provided debt instruments are available. But, after the omission of Sec. 80L, all debt instruments are fully taxable. Plus the lock-in factor has to be considered. Income funds are not an option as interest rates are slated to rise. What you need is some fixed income instrument that is not taxable, that doesn't have a significant lock-in and that won't eat into your capital. The only thing that comes to mind is floating rate funds.

Till the market consolidates, you could temporarily park your money in such floating rate schemes and buy a Systematic Transfer Plan (STP). There is virtually no interest rate risk and the money is fairly liquid. FMPs and Derivative Funds are two other instruments where the interest rate risk is almost eliminated.

Failing to plan is akin to planning to fail. You have almost two months on your side to work out your investments and fine tune your tax outgo. And remember, beyond a point, legally tax saving is not possible. Instead, one should try and optimize the post tax income. And this you can do by following the following four maxims:

 Invest systematically and regularly.
 Invest for the long-term.
 Invest irrespective of the market level - the level is ephemeral, it will keep on changing.
 Maintain your asset allocation pattern at all times.

Related Article: Tax Planning