Here are three primary reasons why you should start tax planning right from the time the new fiscal year starts.
Most taxpayers tend to cluster their tax saving investments in the last quarter only. It is also during this period that issuers come out with a lot tax saving instruments to help taxpayers to reduce the tax burden. Though it is always recommended to include tax planning in overall financial planning, a few individuals do it. Tax, if not planned properly, may lead to fines and penalties for underpayment along with interest on late payments. Thus, merit lies in making your tax planning a round-the-year affair rather than year-end activity. Here are three primary reasons why you should start tax planning right from the time the new fiscal year starts.
1. You do not end up in a liquidity crunch in the last quarter…
This is a common problem that most tax payers face. 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. Obviously, you may not have the liquidity and that means you need to find alternate sources to arrange the funds. If you are not able to arrange the funds, your employer will end up deducting higher taxes and that will further reduce your disposable income each month. Most employers are lenient in the initial months on the TDS front but as they approach the second half, they get more aggressive on cutting your tax. This can be overcome by adopting a more systematic approach. By starting in 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 return. After all, tax refunds can be quite a cumbersome process and quite often get delayed due to purely technical reasons.
2. Round the year tax-planning instills investment discipline in you…
When you try to cluster your tax savings in the last quarter, you end up spending more than necessary in the initial months. Thus with a lower disposable income in the last quarter, you may have to compromise on certain essential items. Here, taxpayers need to understand an important point. Most of us tend to look at savings as a residual item after your expenses are take care of. The round-the-year tax planning approach will compel you to make savings your primary target and treat your expenditure as a residual item. 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 of by allocating Rs.12,500 each month to any of the tax saving instruments. This way, you do not feel the burden of saving for your tax investments and also you make this tax saving investments your priority and then plan your consumption expenditure.
3. Benefit of rupee cost averaging
This is an interesting advantage of planning your taxes round the year. One of the important methods of planning your tax under Section 80C is through investments in Tax saving ELSS mutual funds. These are equity mutual funds with a lock-in period of 3 years. It offers tax benefit i.e. deduction under section 80C of income tax at the time of investment.
The term “Rupee Cost averaging” refers to averaging the cost of investment by investing periodically in a fund. SIP is the best mechanism for periodic investment in ELSS as it works better than lump sum investing in the long run as the volatility in the market tends to get evened out. This also reduces your average cost of holding the fund and enhances your returns. Further, it also reduces the risk of investing when market is high and thereby minimizing cost of investment and maximizing the returns earned from investment. The big advantage of the Rupee Cost Averaging (RCA) approach is that you really do not have to bother about market valuations and timing the market. You enhance your portfolio in good times and accumulate more units in bad times. Over a longer period of time you certainly end up wiser and richer!
