Three ways to simplify setting aside money for investing in tax saving instruments

When the last financial year got over in Mar-11, it could not help but notice the usual pressure among my social to arrange for cash to invest in tax saving instruments. This pressure typically starts building up from Jan and reaches its peak in Mar. For the salaried middle class in India, struggling to make end meets in an environment where prices for essentials are rising the dilemma is how does one save money and put it away for the long term to when one doesn't have money to manage the necessities in life. While it is difficult, it can be simplified by doing three simple thing.


There are some things which I make the whole effort of arranging for funds for investment in taxes much easier.

1. Front load the tax saving investments for the year: I typically plan to invest one-third of the funds to be deployed into tax saving instruments into the first three quarters of the year. For e.g. if I have to invest Rs 60,000 in the whole year, I will invest Rs 20,000 each in the first three quarters of the year. This eases up the last quarter (Jan to Mar). The Jan to Mar quarter is used to manage the pressure only if there have slippages in the investments for the first three quarters. Additionally the last quarter of the financial year is used for planning for the next financial year. Though this trick is not rocket science, it makes the whole exercise much simpler and less stressful. 
2. Save monthly: For example if we are investing Rs 20,000 in every quarter for the purpose of tax saving, then its good good not to wake up in the last month of the quarter with the herculean task of arranging for Rs 20,000. It is better if a certain amount adding up to Rs 20,000 is planned for and saved monthly.
3. Use ELSS intelligently by re-circulating funds every three years: Equity linked saving schemes (ELSS) are open ended equity based mutual funds used for the purpose of saving taxes. All investments in the various ELSS mutual funds come with a lock in period of three years i.e. money invested in the ELSS cannot be withdrawn for a period of 3 years. If I have to for e.g. invest say Rs 30,000 per year in to the ELSS to meet my tax saving plans, then I set up a SIP (systematic investment plan) for 36 months with a monthly investment of Rs 2,500. When the 36 month SIP is over I set up a 36 month SWP (systematic withdrawn plan) where Rs 2,500 is withdrawn every month. This amount of Rs 2,500 every month is then invested into a new SIP. This simply means that once I have saved Rs 2,500 per month for 36 months (which I have already done) I need not worry about arranging for funds for tax planning for the rest of my life. I keep re-circulating the money every three years. The only catch is that the markets provide a positive return where the principal amount ( Rs 2,500) is not lost. Till now my funds have given me a positive return and hence it has not been a worry. 

These three simple steps have made the task for arranging for funds for my year tax planning a much easier exercise, where I feel more in control of my finances.