Aditya Birla Sun Life AMC Limited

It's January and am I late for Tax Planning?

It's January and am I late for Tax Planning?

Jan 14, 2019
4 mins | Views 1918

Income tax, a dreaded word which most taxpayers fear. After putting in the hard work to earn money, who wants to part with the same? However, proper tax planning can help you save the maximum possible tax outgo by reducing your taxable income.

Thankfully, the Income Tax Act, 1961 offers various tax saving investment options that can help you save tax. Taking these provisions into consideration, you can do your tax planning. You are given an entire financial year to plan your taxes and yet when do you start?

Most tax planning activities usually begin from January when March is looming around the corner. Even when you are a salaried employee, you mention a gross investment figure to your HR department so that your net monthly salary is credited to you after deducting Income Tax based on the declared value.

Most people declare the maximum possible amount of Rs 1.5 lakhs for investment U/S 80C. But are they able to fulfil the same? When it comes to actual investments in Section 80C instruments, we often delay it till the last possible minute. Is it a wise move?

Obviously, it is not. But it is surely better to be late than never. Thus, even January isn’t too late if you come to think of it, as there are three months left in this financial year as well.

Ideally, tax planning should be started on early in the financial year. Delaying is disadvantageous on various levels. Some of these include the following –

Hasty investment decisions

As the financial year draws to a close, you make hasty investment choices since you have very little time in your hands. As a result, you don’t get the time to compare the historical returns, judge the merit of the tax saving investment options, and select the first investment avenue which presents itself.

Last Minute Tip for January Tax Planning:

Always remember that you can build a healthy financial portfolio with your annual tax saving investments. Thus, do not make hasty ad hoc decisions and opt for the wrong products just because someone tells you to.

Do your own research. This will not only improve the overall quality of your investment portfolio, but also help you to plan your 80C investments for the next year. So, understand every product well before you invest.

Investment without financial planning

Another drawback of leaving tax planning till the last time is that you lose sight of your financial goals. As you scramble to invest in tax-saving avenues, you don’t weigh whether the chosen investment avenues would fulfil your financial goals or not. The only thing on your mind at the last moment is tax saving, and as a result, financial planning is not given proper thought.

Last Minute Tip for January Tax Planning:

Setting a goal before investing is not only the “right” way to plan your investments, it is the “only” way. Without a goal it is like running a race without a finishing line. You do not know what is your final destination! Tax planning should not be any exception.

So, set your Financial Goals with their years of fulfilment, like child higher education, buying a house, family Europe tour, etc. so that you can track the performance of your investment as % of goal fulfilment. That itself is a motivation to keep investing!

You lose out on the market advantage

When it comes to investments, it is said that the earlier you invest the higher the return you can get. When you delay investments, the returns are diminished too.

For example, if you invest in an Equity Linked Savings Scheme (ELSS) fund through Systematic Investment Plan (SIP) from 1st April, then, up to the month of March in the next year you would have already invested twelve instalments in a tax saving mutual fund scheme. Needless to say, over the year of investment you may have also generated returns on your investment, and you get the advantage of rupee cost averaging.

Contrary to this, if you start investing in January or January, you would be investing the same amount over a shorter period. So, you do not have longer tenure to get the benefit of rupee cost averaging!

Last Minute Tip for January Tax Planning:

Even if you have missed the bus for this year to do SIP, start an SIP in an ELSS fund nonetheless so that the mistake is not repeated in the next financial year!

The necessity of timing the market is eliminated when you invest in ELSS through SIP and invest regularly every month. Through SIPs you get the benefit of rupee-cost averaging which sets you free from the job of timing the market!

Thus, it is obvious that tax planning should be done at the beginning of the year, but that doesn’t mean that you should not invest towards the fag end of the year. So, even if you are late, don’t worry. Start now without any more delay. Its better late than never.

However, from the next year onwards set a reminder to start tax planning from April itself. Start early and avoid the above-mentioned drawbacks in minimising your returns.

In view of individual nature of tax implications, unit holders are advised to consult their tax advisors.

Mutual fund investments are subject to market risks, read all scheme related documents carefully. 

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