Effective tax planning can save you lots of money in the long term that can be used towards accomplishing your financial goals on time. Consistent high inflation and high interest on loans also demand extra effort towards saving money. After all, a penny saved is a penny earned! As the financial year has just begun, it’s the best time to do your tax planning. Here’s how you can do effective tax planning in the new financial year.
Structure Your Tax Planning
Always structure your tax plan into monthly, quarterly and half-yearly goals. It will help you accomplish and assess your tax plan on a regular interval and you can make necessary adjustments, if anything goes wrong.
Assess your income and expenses
Start by reviewing your income and expenses from the previous financial year. This will help you understand your tax bracket and identify potential deductions.
Set financial goals
It’s essential to have clear financial goals and align your tax planning with them. For example, if you plan to buy a house or invest in a retirement plan, consider how your taxes may be affected.
Adhil Shetty, CEO, Bankbazaar.com, says, “Most of us only need three options for tax savings. One is health insurance for yourself and your family. Second is term insurance if you have dependents and financial responsibilities, and the third option is tax-saving mutual funds. However, if you are a risk-averse investor, you can opt for less-risky options such as PPF, VPF, National Savings Certificate and other government-backed schemes.”
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Use tax-efficient investments
Consider investing in tax-efficient investment options such as tax-free bonds, Public Provident Fund (PPF), or Equity-Linked Saving Scheme (ELSS) etc.
Assess past investments
It is always a good idea to learn from your past experiences and challenges you have faced. Tax assessment can be done keeping in mind what were your achievements and mistakes. Plan your tax investments as per your financial goals.
Tax liability in the New Financial Year
Estimating your tax liability for the new financial year is an important step towards effective tax planning. When you have a rough idea about your expected income, you can accordingly make a plan to invest in tax-saving instruments. Take note of things like the expected hike in your salary or business income, the expected size of the bonuses, investments maturing during the year, expected change in rental income, etc. The estimation of income will help you figure out the maximum tax that you’ll be able to save and accordingly what would be your tax liability for the year.
Choose between Old and New Tax Regime
You have two options when you choose the tax slab i.e., old tax regime and new tax regime. The new tax regime is quite simple and doesn’t require you to invest in tax-saving instruments for lowering your tax liability. People earning up to Rs 7 lakh per annum are not required to pay any taxes. On the other hand, the old tax regime requires you to take the help of various tax saving methods like tax saving investments, buying insurance, etc. to lower your tax liability. The new tax regime has been made the default option. So, if you want to adopt the old tax regime, then you have to explicitly request your employer about your intention, else the employer will automatically deduct the TDS as per the new tax regime.
Once you have opted for a particular tax regime in the month of April to your employer for TDS purposes, you can’t change it at a later stage in that year. You can use online tax calculators, or get in touch with your tax advisor to know which tax regime will be more beneficial for you.
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Plan your tax-saving investments
Choose tax-saving investments strictly in sync with your financial goals, risk appetite and liquidity needs. Avoid committing to a very long-term investment for saving taxes unless it suits your financial goals. Invest regularly and don’t wait until the last minute to make a tax-saving investment. Avoid investing more than the applicable ceiling u/s 80C for claiming the tax deduction benefit.
Tax planning should complement your financial goal. You just need to make your tax saving plan early, execute your plan timely and consult your tax advisor from time to time.