If you are a salaried individual or a business person, you pay taxes based on the applicable income tax slab rates. So, in simple terms, as your income grows, your tax outgo also rises. A well-thought-out tax plan helps in lowering one’s tax liability while still complying with the income tax rules. Very often, most of us fail to fully utilise the various provisions provided under the income tax laws pertaining to investment avenues and tax savings as we consider it once-a-year exercise and do not show the urgency it actually requires.
Why can’t tax planning be a random exercise?
Tax planning is a vital part of the financial journey throughout one’s career and during the post-retirement phase. As experts say, people don’t engage in financial planning with short-term objectives and rather set long-term goals to meet the financial needs of their families at different stages of their lives. This necessitates a multi-year strategy in terms of tax planning. For optimal outcomes, one should follow a tax planning strategy consistently throughout the year.
Generally, people discuss investments and tax planning strategies during the last quarter of the financial year. During the first quarter of the fiscal year, employees are asked by their company to submit an investment declaration, for which they need to provide proof of investments later in the year. Moreover, engaging in last-minute tax planning may result in wrong investment decisions. Let’s understand how making tax planning a regular activity round the year benefits taxpayers.
Also Read: Retirement Planning: Why managing your retirement savings is important
Tax planning brings confidence in handling income and expenses
When an individual thinks of a financial plan, he or she has various life goals in mind, such as children’s education, buying a home, post-retirement expenses, etc. By making tax planning a regular and year-round exercise, the person becomes more confident in handling income and expenses efficiently. Adequate tax planning helps in aligning investments with products that ultimately lead to achieving long-term financial goals.
Tax planning helps in avoiding tax-related litigation
Another goal of regular tax planning is to avoid any litigation resulting from non-compliance with tax laws. Individuals who engage in last-minute tax planning often find themselves entangled in tax disputes or receiving notices from income tax offices. The Income Tax Department issues notices when it detects tax evasion or non-compliance with tax laws.
Rupee cost-averaging benefit
Rupee cost averaging enables an investor to purchase more units of a financial instrument when the market is down and fewer units when the market goes up, thereby reducing the average cost per unit. Regular planning involves setting aside a certain amount on a consistent basis for investment, which leverages the benefits of rupee cost averaging.
Tax planning boosts savings
Engaging in regular tax planning means being proactive in pursuing various financial goals. As tax planning often involves making long-term investments to avail deductions under Section 80C of the Income Tax Act, taxpayers can potentially benefit from both tax savings and long-term wealth creation. In this way, tax planning helps taxpayers boost savings over the long run.