Why tax planning should be an all-year-round activity?
Tax planning is done to manage one’s income in a manner to reduce the tax liability to the lowest. A proper tax plan utilizes the tax deductions in the most optimal way. Most people are aware of the tax deductions they are allowed by the Income Tax Act.
Yet, they fail to make better decisions. Just like you should study the entire year to finish the syllabus properly, in the same manner, you must develop a strategy to reduce your tax liability and implement it throughout the year.
Three primary reasons to start tax planning in the new fiscal year
1. Why you do not end up in a liquidity crunch in the last quarter
They do not do tax planning for the entire year and in the last quarter, they try to find the entire corpus for tax-saving investments. They may not have the liquidity and that means you need to find alternate sources to arrange the funds. By starting at the beginning of the year itself, you can ensure that your tax planning gets done well in advance and your requisite documentary proofs are also submitted to your company HR well on time. This will help you to avoid paying excess tax during the year and eventually, you do not have to wait for your tax refunds after you file your return.
2. All Year Round tax-planning instills investment discipline in you
Tax savings in the last quarter, you end up spending more than necessary in the initial months. It will have a lower disposable income in the last quarter, and you may have to compromise on certain essential items. And the taxpayers need to understand an important point. Most of us tend to look at savings as a residual item after our expenses are taken care of.
The answer is to focus more on the saving discipline. So, if you need to invest a total of Rs.1.50 lakh during the year then you can start off by allocating Rs.12,500 each month to any of the tax-saving investments. This way, you do not feel the burden of saving for your tax investments and you make this tax-saving investment your priority and then plan your consumption expenditure.
3. Benefits of rupee cost averaging
The term “Rupee Cost averaging” refers to averaging the cost of investment by investing periodically in a fund. Further, it also reduces the risk of investing when the market is high thereby minimizing the cost of investment and maximizing the returns earned from investment.
Gross Income- Deductions =Taxable Income
- Beginning your tax early gives you ample time to decide upon the investments you would make for a tax deduction. You can compare the various investment options based on interest rates, risk, and other related factors and choose the one that suits your needs and preferences.
- The majority of people make these investment decisions rashly at the year-end just to avoid paying taxes.
- You must utilize the deductions properly by selecting the best possible investment options.
- Maximizing your returns should be your goal. Hence, if you are investing in ELSS mutual funds, fixed deposits, or public provident funds, try to do so at the beginning of the year. In this manner, you will have a longer interest-earning period.
- Starting a tax early on gives you the opportunity to analyze the cash flow for the year, based on past patterns and the needs of the current year. When you have an estimate of the cash-in and the cash-out, you will be able to budget properly without making too many investments for the sake of tax aversion. This will help you to run your daily errands smoothly without any shortfall.
Conclusion
You can consult a tax professional or a Chartered Accountant to give you better guidance on tax planning. This shall reduce the unnecessary stress that comes with impulsive tax-saving investment decisions. Learning from a professional is also a step further in the journey of personal finance.