No one wants to lose their hard-earned money to taxes. But few actually bother to create a thoughtful tax-saving plan and reduce their outgo systematically. To reduce your tax liabilities, it is crucial to begin your tax planning from the beginning of the new financial year. With the start of the new financial year, take a look at the benefits of starting with tax planning early.
You Make The Right Choice
While tax planning is important for all age groups, it is the choice of investment instruments that makes the plan an effective one. Your tax planning and investment planning should go hand in hand to help you achieve your financial goals holistically. It is thus crucial to choose the right investment instruments as per your financial goals in the beginning of the financial year. If you start your tax planning early, you will get enough time in hand to review your choices later and make amendments accordingly. However, if you take up the tax planning process in the last leg of the financial year, you may choose instruments only for tax saving and fail to get good investment returns.
Returns Will Be High
Starting early will help you benefit from the power of compounding. However, if you delay the process of investment, you will lose the returns earned while investing regularly every month for a year. For instance, A Systematic Investment Plan (SIP) in ELSS has a better potential of providing you the benefit of rupee-cost averaging than a lump sum investment. This will also help you avoid a hefty outflow of funds at the end of the financial year. Depending on your risk profile, you should ideally have a healthy blend of equity and debt instruments in your portfolio. If you are the beginning of your career and not averse to risk, you can go for market linked investment instruments for good returns. While risk-averse investors can choose fixed income investment instruments. So give yourself enough time to assess your goals and make a well-informed decision.
Age Based Tax Planning
To have an effective tax plan, it is important to consider your age, income and the other changes in your present financial situation. Here is how to plan your taxes at different life stages:
This is the stage when you are young and have just started earning. While tax planning may not be important for you, beginning early will give you a control over your finances. At this stage, you can afford to choose riskier options like ELSS funds. Their higher long-term returns not only help in beating inflation, but also fetch you deductions under Section 80C. You can also consider investing in safe options — like the Public Provident Fund (PPF) that offers guaranteed returns and tax benefits under Section 80C. A Term Insurance provides at this age will come with lower premium that will remain fixed for the entire tenure of the policy and get you tax benefits under Section 80C.
At this stage, you may be settled in your career, earning a good income and may be having a family to support. After assessing your risk appetite, consider investing in ELSS and ULIPs to enjoy deductions under Section 80C. Your home purchase through a home loan will help you fulfil your goal of owning a house of your own while providing you tax benefits under Section 80C for principal repayment for amounts up to Rs. 1.5 lakh and for interest payment up to Rs. 2 lakh under Section 24B. After assessing your family’s need, enhance your insurance cover and claim necessary deductions. You can also go for a health insurance policy to protect yourself financially from rising healthcare inflation and utilise it for claiming deductions under Section 80D. You can also plan about building a retirement corpus by either investing in the National Pension Scheme (NPS) and claim additional deduction up to Rs. 50,000 under Section 80(CCD) over and above 80 (C) limit.
This is the age, where you would be looking at stability without exposing yourself to any kind of risks. You may be looking at consolidating your finances. You can continue seeking tax benefits under Section 80C for your usual expenses like the home loan, children tuition fees etc. It would be wise to remain invested in the instruments that are less risky but offer good returns.
In 50s And 60s
At this stage, your focus should be at reducing risk and securing a handsome return through your investments. Your tax saving can be taken care of through the home loans, children education loan, life and insurance premiums, NPS investments etc. If you are over the age of 60, invest in the Senior Citizens Saving Scheme (SCSS) and expect attractive returns and simultaneously avail tax benefits under Section 80C. Tax saving fixed deposits and other small saving schemes can also be a good option at this stage.
While the rule for an efficient tax planning it starting early, so it would be a prudent financial move to begin your tax planning process as soon as April begins.
The writer is CEO, BankBazaar.com