Dont recycle investment to save taxes

Mumbai: Recycling may be a great idea when it comes to environment.However,in the world of finance,it is often met with disapproval.Recycling money to save taxes is a common method employed by many investors every year.For example,some people withdraw money from their existing public provident fund (PPF) account to make fresh investments to claim tax break,whereas others use the maturity proceeds from national saving certificate (NSC) or similar schemes to fund their tax saving programme.

According to financial experts,investors should not take this easy way out as it robs them of the chance to create more wealth.The only time this method can be employed is when one is in dire need for cash due to unforeseen circumstances.It is an old trick.A lot of people have been taking money out of their PPF account to make fresh investment and claim tax benefit, says an investment adviser.What is worrying is that many so-called experts are suggesting this method to their clients to save taxes.For example,many investors are advised to redeem money from their tax saving mutual fund scheme after the lock-in period of three years and invest again (sometimes in the same scheme) to claim tax breaks, he adds.

According to financial advisers,this is not such a smart and easy method as its proponents claim.We dont encourage this unless the client has some serious financial trouble, says Kartik Jhaveri,director,Transcend Consulting,a wealth management firm.The basic idea behind tax planning is to create long-term wealth while claiming tax breaks.When you recycle the money,you are not creating any new wealth.You are only circulating the same money again and again, he adds.

Many financial experts frown upon investment recycling because they think the easy way out may result in many investors abandoning financial discipline.Tax planning should be part of your overall financial planning.You should start saving your taxes at the beginning of the financial year just like you save for your retirement or childs education, says a wealth manager,who doesnt want to be quoted.If you fail to do it in a systematic fashion,you may be scrambling for funds at the last moment.You may end up sacrificing some of your other objectives, he adds.He says the method could land people in trouble with the taxman.

However,Kirit Sanghvi,a CA,says that,as per the law,there is nothing wrong in recycling money to claim tax breaks.Earlier,there was a provision that one should invest from the taxable income to claim tax breaks.Even then people used to recycle money, he says.The only thing that is a must is that the investment shouldnt exceed the income, he adds.