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Focus on safe returns

Focus on safe returns

Due to their irregular incomes and low risk appetites, the self-employed should invest in debt instruments like PPF and pension plans which also qualify for tax exemption.

There are several perks of being self-employed. Tax planning is not one of them. You may enjoy flexible timings and be free of bosses, but there is no significant TDS to take care of the major portion of your tax liability.

Sanjay Arora, associate director of PricewaterhouseCoopers, says that most of the non-salaried people falter at the very first step - determining their annual income. "The best way is to take the previous year's income as a base and increase it by the average growth rate of your income over the past few years," he says. What if you get an unexpected project that takes your income well past the estimate? Arora answers: "Like others, the self-employed have to pay tax in three installments. They should review their billable work at all stages and make adjustments for any sudden income."

Does the choice of tax-saving instruments also differ for the nonsalaried? Yes. As you have an irregular income, your risk appetite is lower than that of your salaried peers. Therefore, you must build a bigger debt cushion by investing in instruments like the Public Provident Fund and pension products from mutual funds and life insurance companies. All these instruments qualify for the Section 80C exemption. The corpus built through these investments is especially handy in times like the current economic downturn when it is difficult to meet your average annual income.

This does not mean that like 27-year-old Mokshika Sharma, you can stay away from equities altogether . By investing in monthly income schemes and FDs, this freelance news anchor and stylist has streamlined her income to an extent, but she has lost out on the high growth opportunity of ELSS. The moral? Play safe, but don't lose out on all the fun.

Case Study

Mokshika Sharma

Mokshika Sharma, 27, Delhi

Confused by varying tax deductions by companies? For a professional fee of over Rs 20,000, tax is deducted at 10.3%.

Current asset allocation: Must invest in equities to exploit her risk appetite. She should choose safe equity options like large-cap funds.

Debt: 100 per cent

Her tax plan for 2008-9
Section 80C Her investments (Rs) Our suggestion (Rs)
PPF Nil 50,000
ELSS Nil 20,000
Fixed deposits Variable Nil
MIS Variable 30,000
Pension plan Nil Nil
Total 60,000 1,00,000


  1. Even though Sharma has a variable income, she must invest some money in equities for high returns.
  2. She should consider investing in PPF because the income is tax-free. She can take a loan from the account from the third year onwards and make withdrawals from the sixth year.
  3. The PPF will play an important role in her retirement plan too.
  4. Though the MIS helps to streamline income, its interest is not tax-free. Hence, she should moderate the investment in MIS.