Why early Tax planning is important?
Saving money by reducing your tax liability requires groundwork. Its called tax planning. As the tax season approaches, most of us are scurrying to file our income tax returns. The ones who plan their taxes beforehand, take the cake in the form of tax savings!
But, how can you plan taxes?
You start early, determine the available tax saving investments, invest in them at the end of the year, and Voila! Money saved. However, it isn't as easy as it seems.
The importance of tax planning is often undermined. This stems from either a lack of information, ignorance, discipline or even the dearth of time. It's time though to turn that around and have a look at why tax planning is so important.
A good way to begin tax planning is to recognise changes in your lifestyle choices. An increase in age, new job or profession, higher income, availing of a home loan, and other events that have a tax impact. Additionally, changes in tax regulations laws also affect ones financial plans. A comprehensive tax planning strategy accounts for all these factors.
Why is tax planning important?
The primary perks of tax planning are obvious - you minimise what you owe to the Government by taking advantage of all available credits and deductions.
Here's a quick rundown on why tax planning is so important:
Choosing the right tax-saving instrument
Tax saving is a long term exercise and tax planning and investment planning go hand-in-hand.
There are several tax-saving investment avenues of which you should access the ones that ensure your holistic financial wellbeing. The earlier you start, the more you can benefit from the power of compounding.
Market Linked investments are more suited to higher income groups. Such investments are high return and high risk investments. Conservative investors can choose fixed income investments but this includes a lack of liquidity. You should assess your personal investment choices based on your risk-appetite and liquidity needs.
Section 80C is one of the most popular tax saving provisions available to Individuals.
|(Market-Linked Instruments)||(Fixed Return Instruments)|
|Equity Linked Savings Scheme (ELSS)||Non-Unit linked Insurance Plans (Term life insurance, endowment plan, money-back plan)|
|Pension Funds||Public Provident Fund (PPF)|
|Unit-linked Insurance Plans (ULIPs)||National Savings Certificate (NSC)|
|National Pension Scheme (NPS)||5-Year Tax Saving Bank Fixed Deposit|
|5-Year Post Office Time Deposit|
|Senior Citizens Savings Scheme (SCSS)|
|Sukanya Samriddhi Account|
Benefit from regular investing
The need and importance of tax planning warrants research and planning. By planning beforehand, you can avoid a large lump sum being taken away from your income and instead, let the same amount recede in smaller monthly bites. Investing in a staggered manner as opposed to a one-time investment is fairly easier on your pockets.
Making informed decisions
Tax planning at the beginning of the year helps in making an educated decision. You can go through the scope of alternatives available to you and pick the one that best fits in your plan of things.
The importance of tax planning lies in taking prudent decisions as opposed to making hurried choices that can hamper your financial goals and eventually be an obstacle in long-term wealth creation.
Effectively use the tax saving options available to you
The Income Tax Act 1961 has various provisions under which you can claim deductions and save on taxes. Apart from the investment options, there are several other expenses you can claim a deduction. This includes payment of tuition fees for upto two children, home loan repayment, health insurance premium, medical expenses for treatment of certain diseases, donations, etc. Tax planning is important to make the most of what the Government offers you.
Being aware and updated about such provisions ensures making the best use of the deductions available. Below is a list of deductions available under Chapter VI-A, other than those under section 80C as already discussed.
|80CCC||Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred to in section 10(23AAB).|
|80CCD||Contribution to the National Pension Scheme notified by the Central Government.|
|80CCG||Rajiv Gandhi Equity Savings Scheme (RGESS)|
|80D||Premium paid for medical insurance|
|80DD||Maintenance including medical treatment of a handicapped dependent who is a person with disability|
|80DDB||Expenditure incurred in respect of medical treatment|
|80E||Interest on loan taken for pursuing higher education|
|80G||Donations to certain funds and charitable institutions|
|80GG||Rent paid in respect of property occupied for residential use|
|80GGA||Certain donations for scientific research or rural|
|80GGC||Contribution made to any political parties or electoral trust|
|80TTA||Deduction in respect of interest earned on savings bank deposits|
|80U||Person suffering from specified disability(s)|
Prepare efficiently for the end of the year
For salaried employees who fall in the taxable limits, most companies deduct tax in the last quarter of the year. After accounting for all expenses & deductions, the tax payable is deducted from your salary before reaching you. This is why early tax planning is important. Thus it is wise to avail all deductions available to you in time for then claiming them. By planning ahead, you can also forecast your tax liability and pay it in trenches over a longer time rather than in one single heavy transaction.
Optimise deductible expenses
There are several salary allowances that you are offered to reduce your taxable salary amount. Employees seldom look beyond section 80C for their tax saving endeavours. Taking note of salary allowances and exemptions and the impact these have on your tax payments will help you streamline your financial budget. Restructuring your salary components in an optimal fashion to save taxes, is a simple yet effective avenue towards tax saving.
Tax laws get updated every year. Tax planning is eminent since, when you file your returns early, you may get workarounds about better tax saving strategies for the current financial year. You will be able to better optimise tax deductions available. The importance of tax planning is not up for debate by anybody. It is a clear winner in terms of prudence and wealth preservation.