When you’re young, there is a tendency to concentrate more on spending than on investing. Tax planning hits you once your income goes beyond a particular level. You risk losing money to tax that you could have otherwise saved by smart investing. As years go by, you tend to rush at the end of the financial year. The last quarter of the financial year is when quite a number of tax saving instruments are talked about to help taxpayers reduce their tax burdens.
Instead of making your tax planning a year-end affair, you should include it in all your other plans round-the-year.
Here is how you can benefit by planning your taxes round-the-year:
Sync tax-investments with your income
This is something a lot of taxpayers have ignored over time. Ideally, if you are an employee then your salary will get credited each month. If you are a self-employed individual and you receive a regular retainer income then you can simply follow the path of the salaried. If you receive lump sum amounts, you may want to set aside a portion for tax planning aside immediately.
To get maximum benefits under Section 80C and Section 80D, you may want to discuss appropriate plans. If you are rushing to save tax at the end of the financial year, you may end up making a bad investment choice.
Avoid delayed investment proofs and tax refunds
In case you are an employee, tax saving investment proofs will not be considered by the finance department of your company after the first week of February. These proofs decide the amount of income tax to be deducted. As a result, you end up paying more tax and then you have to wait until you file for returns in July to claim an income tax refund. Poor tax planning means you incur an opportunity cost. As you wait for your income tax refund for months, you will realise that the same amount could have been invested in a better avenue.
The benefit of Rupee Cost Averaging (RCA)
This is yet another way you could incur an opportunity cost. If you set aside a portion of your monthly income for tax planning, you could benefit from rupee cost averaging. This way you will be able to ride the fluctuations without much trouble and also reduce your average cost of acquisition. Equity-linked tax saving plans or schemes may witness changes in their net asset value through the year. If you rush towards the end of the financial year to invest a lumpsum amount for tax saving then you are not really concerned about the net asset value of the plans. If the market price is low, it helps you. However, if the market price is high, you may end up investing your lump sum money at a higher price. Investing regularly for tax-saving relieves you of market timings.
Align tax-planning with your overall planning
Your financial planning involves regular long-term goals like retirement funds, children’s education, buying a home, among other things. Investing for long-term goals and tax planning can be done simultaneously by opting for long-term wealth building tax saving plans, like ULIPs. Investing in tax-saving instruments comes with a lock-in period of at least five years. That adds an element of discipline to your investments.
Last minute rush to invest for tax saving purpose is doing injustice to your financial portfolio. A bad choice or delays in making these investments could mean a loss of opportunity to enhance returns.