7 ground rules before finalizing your tax plan for the year

Come the last quarter of the year and you must be busy finalizing your tax plan for the year. Of course, you must have completed your tax related investments by now and you must be giving the final touches to your tax planning. However, you need to remember that within a month, you will have to start planning for your tax in the financial year 2018-19. Are there any rules before tax planning for the year? Do you have a clear cut idea of how to plan your taxes for the coming year? We are providing 7 very important ground rules which can also act as your tips on tax planning for the coming fiscal year..

1.  Remember, all tax planning is a trade-off..
That is correct! Any kind of tax planning is a trade-off. If you are 30 years old then it would a waste of your risk appetite to use up your entire Section 80C investing in PPF and long term FDs. That is something you can consider at 50 and not at the age of 30. At your current age your focus should predominantly be on tax saving with growth. Look at increasing your exposure to ELSS funds as they provide growth with a low lock-in period of just 3 years. Additionally, since ELSS funds are locked in for 3 years, there is less of churning and fund managers are actually able to take a long term view on equities. This benefits investors in the final analysis. Tax planning is not just about buying debt, but you should also look at doses of equity that can create wealth for you.

2.  Look at the tax efficiency of your tax plan..
If this sounds slightly paradoxical, then it actually is. You need to understand that your tax related investments could either generate regular income or capital gains. In case of ELSS the long term capital gains are still tax-free up to a limit of Rs.1 lakh per annum. That would keep your ELSS earnings for tax planning out of bounds. If you were to invest in PPF, then the interest is tax-free. But there is a talk of making redemption proceeds taxable in case of endowments policies and PPFs. You can use a PPF calculator to see how much your investment in PPF will grow over time, given a certain rate of interest and investment amount. This can help you determine how much you need to invest in PPF to reach your financial goals, even if the redemption proceeds become taxable in the future. Similarly, if you are invested in long term bank FDs, then the interest received will be taxable. At the end of the day, the tax efficiency of your tax plan will also matter a lot.

3.  Don’t look at your tax planning as an independent activity..
That is the cardinal blunder that many tax planners commit. When you plan your taxes, it has to be part and parcel of your overall financial plan. So ensure that your financial portfolio including your tax planning investments are still within the larger design allocated by the financial plan. You surely do not want to have a tax plan that is at cross purposes with your financial plan, creating problems in achieving your goals. That is a situation that is best avoided.

4.  Let your tax planning be a round-the-year process..
Gone are the days when people would hurry to find money and investment opportunity to save tax in the last minute. The options were quite limited back then. That is no longer the case. Mutual Fund ELSS allows you to even do a SIP on a tax saving fund. In fact, the point to be noted is that your tax planning investments must necessarily align with your income flows so that you can plan your entire tax exercise well in advance.

5.  Take proper of the boring documentation part..
This may sound to be quite a mundane activity, but never take chances. You never know what are the documents that the Income Tax department may suddenly call for? Keep basic documents like your Form 16, Proofs of advance tax paid, capital gains statements, your bank statements, your dividend receipts statement, statement of assets, justification for high value purchases etc. This may appear to be a mundane job but to be n the safer side it is always better to be perfect in your documentation. If possible, also store a scanned copy of all these documents in your secure digital locker for easy access anywhere.

6.  Try to finish filing your tax returns early..
We all love to wait till the very end to file returns. That is not advisable. You may realize that you have short-paid your tax. If you start early, you can pay the balance without attracting too much of a penalty. Secondly, the IT server typically faces technical issues when the load is too high. That can be avoided when you file your returns well in advance. Also, if you file your returns early, then you stand a much better chance of getting your refund of tax, if any, also much earlier since most of these are not electronic.

7.  It is not just procedural..
The moral of the story is that you need to look at your tax filing activity this year from a procedural and technical perspective but also look at the timing. In the process, you will make your own life simpler.