"You can spend your whole life planning. But once you are ready, get out there and start doing it" — This proverb holds true for every aspect of our life including handling our tax planning.
All of us work hard to earn a living but we end up paying high taxes. It thus becomes imperative for us to be smarter to save our taxes too, so that it can help us make our dreams come true.
Waiting till the last minute often drives us towards mere "tax saving” rather than "tax planning”; which in my opinion is a not the correct way.
"Tax planning" takes into consideration one’s larger financial plan taking into account one’s age, financial goals, ability to take risk and investment horizon. Hence, remember to commence your "tax planning” exercise well in advance by complementing it with your overall investment planning exercise.
Many of you might be busy throughout the year making a living but show the same dedication in your tax planning exercise to save more. Below are points which individuals need to look into.
The root of all mistakes lies in waiting till the eleventh hour to save taxes, which eventually leads to mere tax saving leading to forgetting or ignoring the facets of financial planning.
For most of you, claiming deduction under Section 80C would mean investing in a ULIP and being done with the tax headache. You will end up having 4–5 insurance policies with varying plans and clauses, most of which would be undecipherable and don’t even suit your real need.
A single pure life policy covering 12–15 times your annual salary would work cheaper and serve the purpose
Many of you absolutely rule out the concept of power of compounding to your portfolio despite the fact that age, income, ability to take risk is on your side. If you want to increase or even meet your standard of living going forward, you need to beat the rate of inflation. And thus, role of equity as an asset class cannot be ignored in one’s tax saving portfolio. If the ideal composition is not maintained it leads to tax saving portfolio giving lower returns.
Tax planning doesn’t start and end with Section 80C. Our IT Act also considers deductions in case if you pay your or your parent’s (senior citizen) medical insurance premium, medical treatment/insurance of a "dependant” handicapped, donate to specified funds for specified causes, take a loan for pursuing higher education or if you are suffering from "specified” diseases. Taking a home loan, investing in Rajiv Gandhi Equity Savings Scheme and National Pension Scheme further reduces your taxable salary.
If you are a salary earner, chances are that you may oversee the various allowances that are allowed as exemption from your salary. These allowances could be HRA, transport allowance, medical allowance, food coupons, reimbursements on periodicals, telephone bills, uniform, fuel and maintenance of vehicle. Ensure that you diligently submit the bills for all your reimbursements and get extra bucks without the tax burden.
Employers deduct TDS every month from your salary based on the projected tax liability.If you don’t declare your planned tax saving the projected tax will be higher resulting in higher TDS. By the time you declare all of your tax saving instruments, it has become very late as TDS is already deducted.
Even if you declare all the tax saving option but avoid implementing till the last quarter you will have a burden of investing or face a big tax cut. So, Start Early.
An old Chinese proverb says, "It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.” which applies even to your "tax planning” exercise. Adopt the prudent steps while doing your tax planning. It will enable you to achieve the long-term objective of wealth creation and protection.
