Being disorganised or lethargic when it comes to tax planning impacts important aspects of your life. Procrastinating could lead you to make unwise last-minute investments without examining the validity or competency of the products.
Start early
It is prudent to plan your tax early. This helps in reducing your tax burdens by using tax exemptions and deductions – the smarter way.
Tax liabilities that are incurred due to incorrect decisions made at the last hour are reduced. You as an investor can take advantage of deductions that are available ranging from Section 80C to 80U. What’s more, you could apply varied sections under the Income Tax Act 1961 for tax exemptions and credits.
Planning helps identify your tax
You as a salaried employee might be making investments under Section 80C like Life Insurance, PPF, ULIP etc. This saves and possibly lowers your tax. But guess what?
The core purpose of your investment should not just be tax saving. It should focus on a long-term perspective like being financially independent after retirement and maintaining the same lifestyle that you’re were previously accustomed to.
Do refrain from making haphazard investments without taking into account your risk-taking capacity, the fixed tenure of investments, continued payment towards them etc.
Declare every income source
Compound interest earned on NSC and total interest earned on the maturity of the FD is taxable. Dividends received, income generated through the sale of property and gains received through varied financial products may constitute other sources of income besides your salary. Failure to cite these sources or understating the derived income can lead you to be penalised with hefty charges.
Restructuring your salary
Your salary is divided under various sub-sections like basic salary, medical expenses, tuition fees, uniform allowances etc. Their taxability varies from one another. Conveyance, periodicals, telephone and internet, for instance, enable you to perform your work-related duties.
So companies are usually obliged to provide reimbursements for them. These components might be claimed for tax exemptions. Restructuring your salary accordingly could lower your taxable income.
Avoid investing for longer lock-in periods
When you limit your investments to traditional instruments with higher lock-in durations, you might minimise your chances of creating wealth on a long-term basis. This may also prevent you from utilising your corpus astutely. Refrain from staying invested in very stretched lock-in periods, and investment allocation towards certain market-linked instruments.
Not just investing but spending wisely too gives you tax benefits
You should also focus on making practical spending decisions. This could help you to increase your savings apart from tax-saving investments.
There are pockets of spends that will optimise your tax liability. Provisions like Leave Travel Allowance (LTA), rent for home (HRA), the premium paid for life and health insurance, tuition fees will ensure that your planned and compulsory spends give you a benefit of tax under various heads.
For instance, if an individual has a taxable income of Rs 12 lakh, the total tax payable is Rs 1,72,500 (without cess). If one pays a rent of 200,000 per year, it is exempted under HRA and the taxable income for the same will be 10 lakhs. This will bring down the tax liability to Rs 1,12,500. Thus saving Rs 60,000 on the overall tax.
Steer clear of procrastination
Both an impractical financial choice or a delayed one could hurt you at the last moment. Take advantage of being a fast-mover. Shun procrastinating endlessly to yield a more favourable outcome.
Saving tax mustn’t crunch your surplus
Trying to reduce your taxable income especially when you’re already late could create a mini-crisis. Don’t mess up your emergency corpus to make an investment in a tax-saving instrument. This approach that’s best avoided at all costs.
Look for professional guidance
Just like you’d visit a clinic for a health check-up to maintain your fitness quotient, it’s also critical to consult or ask for the advice of professional advisers to stay financially fit.
They will assist in navigating you through the tricky maze of direct taxes, mutual funds, annuities, senior citizen funds etc. and correct your misconceptions and biases.
Curb forgetfulness. Be punctual in filing returns
Stay ahead or be on time when filing your income tax returns. Doing so provides you with ample of time to set right any improper choices. You can verify or crosscheck to avoid paying huge, unnecessary penalties.
The tax dynamics keep changing on a year-on-year basis. Every budget requires to be analysed and understood by a taxpayer, only then can informed financial decisions be arrived at.
Also, investing and spending both comprise crucial parts of one’s savings, so they should be given similar importance.
Tax planning should not be restricted to just saving a few bucks. But it should offer you a long-term promise of greater financial wellness for tomorrow.
(The writer is Founder and CEO, 5nance.com)
