Most of us appear to understand the importance of year-end tax planning. But in reality tax planning should be a round-the year exercise. Tax planning in India typically gathers steam around January each year since the proofs need to be submitted to the accounts department. That is the time when the finance team in each company starts pressurising the employees to submit their tax proofs. However, did you know that there is merit in making your tax planning a year-round activity? You know the advantages of tax planning but it is also important to plan your tax planning much better. If that sounds a tad confusing, then here is how to go about tax planning in India in a more organized manner.
There are 5 distinct advantages in phasing your tax planning through the year. Here is why..
You can sync tax investments better with your income flows..
This is something a lot of tax payers ignore. As an employee or a businessman, your incomes are periodical and regular. Typically your salary gets credited each month or in business your inflows are in the first week of each month. While you surely understand the importance of year-end tax planning, you must realize that you are putting yourself under unnecessary financial stress. Your allocations to Section 80C, Section 80D all can add up to quite a bit. You obviously do not have the liquidity in the last quarter so you end up borrowing. You can avoid all that by making tax planning investments a round-the-year activity. To begin with, try to allocate a fixed sum for your tax planning investments each month.
You can avoid the hassles of delayed investment proofs and tax refunds..
This is quite normal for most tax payers. If you are employed, then the finance departments of your company will not accept tax investment proofs after the first week of February. Any investment made after that will not be considered by your company for deciding the amount of TDS deducted. As a result you end up paying excess tax during the year and eventually end up waiting for your tax refund after you file your returns in July. You can avoid all these hassles by planning your total tax investments at the beginning of the year and allocating to your investments on a monthly basis. The advantages of tax planning can be better realized that way.
Products like ELSS will give you the benefit of Rupee cost averaging (RCA)..
This is another major of the advantages of tax planning when you do it on a systematic basis. If you propose to invest Rs.1 lakh in an ELSS fund to save tax under Section 80C of the Income Tax Act, then it is better to structure it as a SIP equated over each month. That way you can ride the fluctuations of the market much better and you will end up with a lower average cost of acquisition. Apart from the fact that a regular SIP matches better to your inflows, it has been empirically observed that when you invest in ELSS in SIP format over a longer period of time, you are able to better manage your average cost of holding at a lower level.
Your tax planning has to sync with your financial plan and that is better done regularly..
Remember, your tax planning is not an isolated experience to be done intuitively at the end of the financial year. Whether you buy PPFs or LIC policies or long term FDs or Mutual Fund ELSS schemes, each of these products have to be in sync with your financial plan. Planning your taxes as distinct from your long term financial plan actually defeats the very purpose of long term financial planning. Your financial planning involves regular outlays for long term goals like retirement, children’s education, home acquisition etc. The most important criterion is that all these should be done in a tax efficient manner. The only way to do your financial planning in a tax-efficient manner is to sync both these activities. That is best achieved by making tax planning in India a regular affair.
You can optimise your tax outflow better..
Among the many advantages of tax planning, this is perhaps the most important. The importance of year-end tax planning is that you have a plethora of products available. But there is no need to wait for the year-end rush. Your tax outflow may go up sharply if you get an increment or get a year-end bonus. If you can plan these things well in advance and do a monthly allocation towards such possibilities, you will really be better off in post-tax terms.
Remember, tax planning is not just planning your taxes but also planning your tax planning. The golden rule is that your tax plan must gel with your overall long term financial plan. That pre-supposes a regular and systematic approach to tax planning and tax-related investments. That is the key!