The Hindu Business Line : Financial plan for an IT professional

Kartik, 42, is an employee of a leading software company in India and wanted help on tax planning and wealth creation. He had recently moved to another leading software company and wanted to look at a comprehensive solution.

His key needs were in terms of planning for his children’s education, retirement and coverage of health needs. He explained: “I would like to send my son overseas for education. Retirement savings is a key need because based on my own estimates, my retirals need to take care of 25 per cent of my pension. I have also seen my parents have health issues and they ended up spending quite a lot on that. I would like to cover this need for myself, after retirement when there is no company cover or steady income to meet medical expenses”. Karthik also wanted to evaluate all possibilities to save on taxes. He mentioned that he also has just purchased a second house as an investment in a different city and wanted to know if there was any tax saving on it.

His portfolio was as follows: (Table)

His own house, in which he was now residing, was valued about Rs 1.4 crore at today’s prices but has been ignored for the purpose of his investment and tax planning.

Planning for his taxes

What were his tax-saving avenues? There were company reimbursements that he was not taking advantage of completely. Since there was a company car scheme, he should transfer the car in the company’s name to benefit from tax benefits on the monthly instalment payments and fuel/maintenance. Other exemptions, such as Leave Travel Allowance (LTA), could be availed on his vacation. There was an employer-employee insurance where he was able to save substantial tax on his annual premium of Rs 10 lakh and the employer could be convinced regarding the merits of the policy. He could take the Hindu Undivided Family route to reduce his taxes, especially since he had reasonable interest income that he would pay taxes on. He could also take medical insurance for either his family or dependant parents.

He was surprised to know that he would end up getting a tax benefit on the second home loan. It made sense for him to take a loan since it provided him with tax breaks. Since interest rates were already pretty high, he could take a floating rate loan rather than a fixed one. He would not get the benefit of the interest he paid at the time of construction; the benefit on this is deferred over five years from the time of occupation. Once the second house is completed, he needs to show the rent received as income and there was a tax deduction on the same. He could also show a loss from house property, as he could reduce the interest on home loan payments, against income from house. This loss would help him get an additional deduction that could be set off against salary income.

There were other tax efficient investment avenues to increase his savings and investments, such as debt mutual funds, insurance, equities and equity mutual funds. Once his ESOPs became long- term instruments, he would be in a position to sell the share without any capital gains tax impact.

Planning his investments

Karthik was keen to diversify from his ESOPs. There were different price points at which he could sell his ESOPs. He could also follow a de-risking strategy of investing into diversified equity and equity mutual funds for a part of his portfolio. A combination of government bonds, insurance, portfolio management schemes and Mutual Funds would meet his investment needs. There was an attractive real-estate fund that he could consider, as it provided him with an opportunity to participate in the commercial real-estate market, which he would not have been able to do on his own. The recommendations above ensure that the returns would suffer zero or minimal tax. With a structured plan for phasing out his ESOPs into diversified equity, he could reduce risk, enhance return and also comfortably achieve his needs. He could also go for a family floater health insurance product.

The Secret is Simple — Structured investing, diversification, and smart tax planning can create value for a high net worth investor. For a salaried person, after taking advantage of various reimbursements, exemptions and deductions, it was important to use tax efficient investment avenues. ESOPs create a high level of risk that expose employees to market volatility. But managed risk can still give good returns while also securing one’s portfolio from market volatility.

(The author is CEO, Right Horizons, a Wealth Management and Investment Advisory firm with presence in Bangalore, Hyderabad and Chennai.)

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