It is always better to start your tax planning early to be in a better position to minimize your tax outgo and avoid last-minute glitches.
There are two types of taxpayers – those who plan their taxes at the very last minute and are at risk of making certain costly mistakes, and others who start their tax-planning early and are better-positioned to minimise their tax outgo and boost their savings. So, if you’re looking to ensure a smooth tax filing process and save money in tax outgo, you’ll be well-advised to plan your taxes early. Read on as we discuss a few tips on how to go about it.
1. Select the right tax-saving instrument
As you start planning your taxes early, i.e. several months before the current financial year ends, you should try to strike the right balance in terms of choice of tax-saving instruments. You should ideally select tax-saving investments that can help you achieve your financial goals in time. Early planning allows you to carefully evaluate the returns offered by your shortlisted investment products and figure out which ones are aligned with your financial goals and risk appetite and can suffice your liquidity requirements.
For example, if you are close to retirement, you might benefit more by investing in tax-saving debt-oriented investment products that carry minimal risk, like Public Provident Fund (PPF), National Savings Certificate (NSC), among others. On the other hand, if you are young and looking for a high return, you should keep certain equity-oriented tax-saving products like Equity Linked Savings Schemes in your investment portfolio.
It will be pertinent to note here that there are various tax-saving tools that come with a lock-in period of 3 years, 5 years, and even longer, and you can choose as per your financial goals and other considerations.
2. Invest through instalments
A common misconception is early tax planning is synonymous to investing lump-sums in tax-saving instruments. This is not true. In fact, it’s better to invest through instalments to gain rupee cost averaging benefits while keeping liquidity concerns at bay. As you get closer to the end of the financial year, you can increase or seize the investments depending on whether you have exhausted the tax deduction limit under the prescribed Income Tax Act. For example, under section 80C you can invest in the ELSS, PPF, etc. every month.
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You need to keep in mind that you don’t exceed the investment threshold allowed under the applicable act for a tax deduction. For example, the deduction threshold u/s 80 C is Rs 1.5 lakh, and if you invest more than this applicable prescribed limit, you won’t get any additional tax benefit on such excess investment.
3. Exhaust the allowances received from the employer
There are several allowances that employers provide to their employees – like food coupons, reimbursements on mobile and internet bills, among others – which can lower your tax liability. By planning early in the financial year, you get sufficient time to utilise these allowances efficiently and reduce the tax outgo. Using tax-saving allowances also helps in alleviating the burden on your financial budget as you can focus on using the fund for other expenses.
4. Estimate your tax obligation and avoid last-minute glitches
Make an estimation of your tax liability for the current financial year and use that estimate to determine your monthly or quarterly tax obligation. It will help you to ascertain how much would be your tax liability at the end of the year, and accordingly, you can fine-tune your tax-saving investment steps every month or quarter. If there is a deviation in income in any month or quarter, you can accordingly increase or decrease your tax-saving investments.
Taking last-minute tax-saving steps can also put you at risk of committing serious and irreversible financial mistakes. So, the better option is to always plan it early and remain stress-free.
(The author is CEO, BankBazaar.com)