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MONEY TRAP - 18 : Leaving Your Tax Planning To Advisors

Mr. C.S. Sudheer | Posted On Friday, July 15,2016, 06:56 PM

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MONEY TRAP - 18 : Leaving Your Tax Planning To Advisors



There is a famous saying by perhaps the greatest scientist of all time “The Hardest Thing In The World To Understand Is The Income Tax”. If Albert Einstein finds understanding tax so difficult, what about mere mortals like you and me. Fortunately you have advisors who for a fee do this very difficult job for you. A pity Albert Einstein did not have some of these advisors. These advisors help you file your income tax returns….help you make use of tax deductions and save your money from those leeches of the income tax department…make sure you enjoy the benefits of tax exemptions…What more do you want? Yes…advisors do a good job…but should you just leave them at it? After all aren’t they professionals? Advisors no doubt do a great job, but it is always good to know what they are doing with your hard earned money. Leaving your tax planning in the hands of the advisor without paying any attention to what he is doing, can be a serious mistake. Need help with tax planning? Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

An advisor helps you save tax

Your laptop has stopped working. Will you repair it yourself, or will you call a computer repair technician to do it? You will most probably hire a computer technician, who would do the job. You will have to watch him like a hawk, otherwise he might just slip away without properly repairing your laptop. If you can watch your computer technician while he repairs your laptop like a hawk, then why can you not do the same for your advisor? Should you just leave tax planning to your advisor?

Let us understand why you need to watch your advisor. Akash who is 35 years, works in an IT Firm. Akash earns INR 8 Lakhs a year. Akash just cannot understand tax and hires an advisor to plan his taxes and help him file his income tax returns. Akash does not want to make a mistake while filing his income tax returns and get an income tax notice. He also does not want to lose money through wrong tax planning. Akash has heard that advisors are technology savvy and can do his tax planning is no time. Akash would be able to save on his tax and have no headache from the income tax department. Akash hires an advisor, Jayan, to do his tax planning and help him file his income tax returns. Job done….or is Akash missing something? One day while at the park, Akash meets an old friend Satish. Akash tells Satish “I have no headaches from the income tax department. Jayan my advisor takes care of everything. He helps me save a lot of money with good tax planning”. Satish advises Akash that leaving tax planning to his advisor, Jayan, without paying any attention to it, is a bad idea. Akash must know what Jayan is doing….After all the money belongs to him and it is hard earned. Akash follows the advice of his friend Satish and learns the basics of good tax planning. Akash asks Jayan to show him how he is managing his money. He studies the tax plan, Jayan has prepared for him. Akash no longer allows Jayan to do his tax planning alone. He knows what Jayan is doing to save his money. Jayan also knows that Akash pays attention to his tax planning and is very happy about it. He comes up with newer ideas to save Akash his taxes. Fortunately for Akash, Jayan was honest and good in his work. Many citizens are not so lucky. An advisor has a lot of knowledge on finance and tax which he can put to the wrong use.

What happens if you leave tax planning to your advisor? If you are lucky and your advisor is honest, your money is in safe hands. But if you do not pay attention to your tax planning, your advisor might not do a good job or thoughts of stealing or misusing your money, might creep in. He would be very cautious; if he knows you are keeping a watch on him and know your taxes. This might just save you from falling into the money trap.

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Advisors should not sell. Sellers should not advice

Is your advisor being absolutely honest with you? You’re not sure….Perhaps he is…Perhaps he isn’t… Let’s listen to this case of Ashwin and then make a decision. Ashwin is 32 years and works in a construction firm. Ashwin earns a salary of INR 6 Lakhs a year. Ashwin can’t understand head or tail of taxes. Ashwin hires an advisor Nikhil, to help him in his tax planning. One day Nikhil calls Ashwin and tells him….You can enjoy a tax deduction up to INR 1.5 Lakhs a year on your taxable salary. All you have to do is avail an endowment life insurance plan. This insurance plan not only saves you tax, but also gives you life cover and a savings benefit. You get a tax benefit on the premium you pay for the endowment life insurance plan.

Nikhil also recommends that Ashwin avail this insurance plan, from a particular Life Insurer. Ashwin trusts Nikhil, and has no hesitation in availing this endowment life insurance plan. What Nikhil does not tell Ashwin is that he pockets a commission for every endowment life insurance plan he recommends, from this Insurer. Nikhil also does not tell Ashwin that there are other financial products such as PPF and ELSS which enjoy the same tax benefit. No doubt Nikhil has helped Ashwin save tax…but the endowment life insurance plan has high charges in the initial years. These charges are deducted from the premium paid by Ashwin and paid to life insurance agents, by the life insurer. Ashwin has needlessly availed an endowment life plan, when he could have availed a term life insurance plan for his life insurance needs and maybe invested in PPF or ELSS depending on his risk profile.

What do you learn from Ashwin’s mistake? Ashwin should have done his homework on tax, instead of blindly trusting his advisor Nikhil. If Ashwin had asked some basic questions, Nikhil would not have dared recommend him an endowment life insurance plan. Ashwin needlessly lost his money, when he availed an endowment life insurance plan which no doubt saved his tax, but did not match his needs. He could have invested in financial products or availed a life insurance plan which matched his needs. Ashwin lost his money and fell into the money trap, just because he left tax planning to advisors.

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