Aditya Birla Sun Life Mutual Fund

Why Early Tax Planning is the best advice to follow?

May 30, 2019
6 mins | Views 7000

Many of us are guilty of scurrying around at the last hour (Read - month of March) to choose investments or instruments to save our hard-earned money and reduce our tax obligations. However, that is not the right approach. Not only does it cause you unnecessary stress but also does not get you the best return on your investments. You must have heard the old proverb, “The early bird catches the worm”. This saying is relevant even for tax planning purposes. Read on to know the right time to begin your tax planning and the benefits associated with it.

When is the ideal time to start tax planning?

Tax planning should start along with your income accrual. In simple terms, as soon as you start earning income in the first month of the financial year, you should simultaneously begin planning your taxes. In case you are unable to do so in April, sooner you start this task, better it will be for you.

How to start with tax planning?

The first step in tax planning is to understand the taxation rules applicable for the concerned financial year. Consider any major changes introduced in the budget such as tax slabs, introduction of new deductions, removal of any benefits that have a tax implication.

Another thing to consider is any modifications in your own personal situation. For instance, the age at which you are eligible to get senior citizen benefits, professional changes, tax efficiency of certain loans like home loans, education loans, etc. or any such events that have an impact on the tax calculations.

Once all this information is readily available with you, you can start identifying investment instruments as per your need, financial goals and risk appetite. For example:

  • if you are comfortable with taking some risk for long-term wealth creation, then ELSS (Equity Linked Savings Scheme) could be a tax saving option for you.

  • If you are completely risk averse, then you can go ahead with conventional investment options such as PPF, Bank Deposits etc. However, you must keep in mind that the liquidity of such investments is usually on the lower side. Strike the balance between your financial goals and liquidity needs and take the call.

Why should one opt for early tax planning?

  • Optimize the available options

    Tax planning if done at the right time is not only a means of minimizing the tax obligations but also helps in generating wealth over time. If you start early, you can examine the markets thoroughly to identify the best suitable investment product for you. For instance, ELSS has the potential to earn reasonable returns over the long term. Additionally, you can reap the benefits of professional fund management and relatively shorter lock-in period. Scouting for the best scheme takes time and is not possible at the last minute.

  • Regular investing

    Regular and periodic investment has its own benefits. When opting for tools such as ELSS, it is better to take the route of SIP. It helps to reduce the risk involved with equity investing.

  • No lumpsum payouts

    When you start planning your taxes in advance, you can start investing small amounts every month. This saves you from a situation wherein you have to fork out a substantial percentage of your monthly income towards tax saving investments. Such last-minute payments can cause havoc for your monthly expense management especially you have EMIs to be paid.

  • No last-minute omissions

    When people wait till the last minute, most of the times they forget that tax planning is not only Section 80C. There are multiple other ways to save taxes. For instance, if you have made any contribution to charities, paid medical insurance premium for self or parents, paid off any loans, then you are eligible for deductions. Timely tax planning ensures that we do not miss out any such important details and look at the picture holistically.

  • Correct tax calculation

    Many people in the end minute rush forget to add up all the income for their tax calculations. Income earned from deposits, bank accounts, rental income also needs to be included for correct tax calculation.

Final Word:

Time and the taxman wait for no one. So, start your tax planning early and watch your money go up and stress go down!

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

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