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Filing income taxes is an annual task that most of us look forward to. You might be tempted to wait until the final call to gather all the necessary information and file your returns. However, planning your taxes early can cut down the stress of paying taxes towards the end of the year and also save you money by eliminating financial mistakes, if any.
Lack of tax planning could lead to confusion later in the year. Typically, as the year-end comes near, people start buying financial product/s that could help them save taxes, and some of them end up buying the wrong product/s. Therefore, in order to avoid this common mistake, you must start planning your taxes early.
Avoid Penalties
Failing to pay your taxes on time will result in penalty charges as well as an additional interest on the money you owe the government. You can avoid the penalty charges by planning your taxes early and giving attention to minute details. Even if you are entitled to obtain a tax refund, the more you delay filing your taxes, the less time you’ll have to invest and gain interest on the refund amount. Early tax planning will also help you determine if you should be making an estimated tax payment before the year end.
Take Advantage of Deductions & Exemptions
A few income tax slab deductions and exemptions are obtainable every year, while some others are available only for a limited period of time. Planning your taxes early will help you identify the tax exemptions and deductions that you can benefit from if acted now, which you won’t be able to do in future.
If you start planning your taxes early, it’ll be easier for you to find a professional tax consultant who is dedicated to resolve your queries and find a solution to your tax woes. This step will also help you avoid last-minute dealing that could lead to overlooked deductions, exemptions or system errors, especially when you’re handling all this by yourself.
How to Go About Planning?
Start planning your taxes by calculating the total amount of money you are currently paying towards different financial instruments that qualify for tax deductions. So, say for instance, if you are currently paying around Rs 70,000 every year for these instruments, then you will need to invest another Rs 80,000 in appropriate financial instruments to avail the benefits of Rs 1,50,000 in tax deductions.
What are the Options Available?
Equity Linked Saving Scheme (ELSS): ELSS is similar to any other equity mutual fund offering tax benefits. To opt for investment plans, you can choose to invest a lump-sum amount in such schemes or opt for a Systematic Investment Plan (SIP). SIP gives you the facility to invest a certain amount of money in a scheme at regular intervals and yield better returns in the long run.
Public provident fund (PPF): A PPF account allows you to invest as low as Rs 500 and maximum Rs 1,50,000 in a financial year. Based on your needs and availability of funds, you can alter the amount you invest every year. PPF is the most preferred form of investment since it offers a return of 8.1% per annum (as on Aug 2016) that is fully exempted from Income Tax.
Fixed deposit: FDs have always been the most preferred avenues of investment. However, the interest on your fixed deposit is taxable. A tax-saving FD has a compulsory lock-in for 5 years. You cannot withdraw the funds before the completion of the tenure. Today, a PPF has an edge over fixed deposit because returns from PPF are not taxable. In both the cases, money gets blocked for a specific period.