When is the Right Time to Start Tax Planning?

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It is common for people to start their tax planning in March as the only thing they focus is to get maximum income tax benefits. The amount of taxes to be paid and the saving you can do therein should always be considered as a part of the overall financial plan.
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Investments made for the purpose of saving taxes are beneficial in helping you to achieve your financial goals. The taxes saved through deductions increase your savings amount, which may be invested for a secured financial future.

The sooner you start your planning for your tax commitments, the better it is for you and your family. It allows you to do thorough research on the various investment instruments available in the market and choose the ones that best fit your needs.

Moreover, the longer you stay invested in good performing instruments, the higher returns you will earn. This is an excellent incentive to start your tax planning early. You should be mindful that there might be conditions which may not allow you to meet your investment commitments and therefore your plan must be flexible.

Let us see six common problems faced when you delay tax planning strategies.

  1. When you commence late on investment planning, you are often rushed for time. As a result, you may make inaccurate calls or ill-informed decisions leading to bad investments. This increases the risk of being locked-in for a long period in an incorrect investment option.
  2. An ill-informed investment may reduce your earnings or may even result in capital losses. This risk is significantly reduced when you take the time to evaluate and analyze different investment products and make well-informed choices.
  3. If you discontinue or redeem your investments because of poor performance, you may have to pay certain penalties or charges. This further increases your loss and must be avoided.
  4. When you want to reduce your tax liability at the last minute, you may need to invest a higher lump sum amount. However, you may easily reduce your year-end financial burden by commencing early and distributing the contribution over the entire year.
  5. Investing a lump sum amount in the last month makes you eligible for earning returns only for that period. This reduces your total earnings because when you spread your investments, these earn returns from an earlier date of investment.
  6. When you begin investing early, achieving your financial goals becomes easier. It provides you sufficient time and liquidity to save what is required for a stable and secure financial future.

Making your tax-saving investment strategies

Tax planning is a meticulous process and should be carried out diligently. Here are four steps to make efficient tax planning strategies.

  1. Calculate your tax liability

Based on your income, estimate the amount of tax liability you would have at the end of the year and the amount of deduction you can claim thereof.

  1. Determine additional investment needed

If you have already invested in some tax-saving instruments, deduct these to determine the additional amount you may have to invest to reduce your tax liability. The next important thing is to choose the appropriate investment instrument.

  1. Consider an insurance plan

If you do not have adequate insurance coverage, consider buying a term life insurance plan. The premium is eligible for tax benefits while term plans provide maximum coverage at a lower amount.

  1. Choose health coverage

It is crucial to ensure you have sufficient health insurance coverage to take care of your physical and financial health during a medical emergency.

When you choose tax-saving financial products, it is important you consider some important factors. These include your financial objectives, lock-in period, risk profile, personal tax bracket, inflation rate, and tax liability.

Although there are several tax-saving products, equity-linked savings schemes (ELSS)offer several benefits.

What are ELSS Funds? ELSS tax-saving funds are equity diversified mutual funds that offer capital growth and tax benefits. The investment amount is eligible for tax deductions under section 80C of the Income Tax (IT) Act. Additionally, returns earned on redemption at the end of the three-year lock-in period are tax-free.

ELSS tax-saving funds when compared to other tax-saving instruments such as Public Provident Funds (PPF), National Savings Certificate (NSC), and others have a shorter lock-in period. Furthermore, because the ELSS corpus is invested in equity-linked products, it provides higher returns when compared to other fixed-income instruments.

Formulation of tax planning strategies must begin at the start of the financial year. The risks associated with delays are huge and may result in severe outcomes. Avoid these and start early.

If you still have not started, begin now!