In this post, we will share with you 4 simple & powerful tips to help you complete your tax planning in an instant & at the same time save you from mistakes that can cost you a lot of money in the long run. So, grab a cup of coffee & read on…
Tip # 1: Check your tax liability for the year
The first thing you need to do is to assess your income tax liability for the year. The question of tax planning will arise only if there is a net tax payable by you.
While calculating the income tax liability, you need to consider all the incomes you have earned & all the deductions available to you under the income tax law. Some of the readily available deductions that people miss are as follows:
· Payment of school tuition fee
· Life and medical insurance premium
· Life and medical insurance premium
· Donations to approved institutions
Make sure that for the deductions that you wish to claim, you have proper proof/ documentation like a rent agreement, donation receipts, premium certificate, etc. This will help you in case there is a tax assessment in the future.
Tip # 2: Compare OLD vs NEW taxation regime
One significant change from last year’s Budget is that you have an optional new tax regime in place. This new regime prescribes a lower rate of taxes and very few deductions. You can do the necessary calculation & choose the regime which is beneficial to you.
Suppose you are a reasonably young investor & don’t have sufficient funds at your disposal to make fresh investments. In that case, the new tax regime can be helpful to you.
However, suppose you are an experienced investor and have been making tax-saving investments every year & have a running home loan as well. In that case, there are chances that the old regime may be beneficial to you as compared to the new regime.
Tip # 3: Plug your insurance gaps first
Now let’s assume that you need to make fresh investments to reduce your tax liability. Here, you should ensure that you have sufficient insurance protection in the form of the following insurance:
· Term life insurance
· Mediclaim insurance for self, family & also parents
· Preventive health check-up
Making insurance a first priority is essential for young investors. The wealth corpus is not enough to secure the family’s future if the untimely demise of a breadwinner or a medical emergency is in the family. Insurance helps in the form of a secure foundation on which you can build your wealth castle.
Tip # 4: Do a holistic evaluation before selecting the investment:
Tax saving investments is not just about saving tax. It should also help you create wealth for the long term & help you comfortably meet your financial goals. So, before choosing a tax saving investment, consider the following factors:
· Decide on your financial goals and when you need the money – Longer the time to goal, higher the risk you can take.
· Decide on your much risk you can tolerate. In simple terms, this is the portion of investment you’re willing to keep invested in equity & retain the ability to sleep peacefully at night.
· Consider the risk, lock-in period, liquidity, taxation etc. of the investment to get a holistic view & whether the investment is aligned to your financial goals. Don’t get blinded only by returns.
However, if you are short of time to do all of the above, you can consider investing in ELSS and PPF. Note that ELSS is a long-term investment & make sure not to withdraw it before at least 5 years. As regards PPF, it carries a 15-year lock-in.
Timely tax planning helps to avoid many costly financial mistakes which cannot be undone. However, even if you are late in planning your taxes, you can take some simple last-minute financial steps. The steps will help you minimize your risks and ensure that the investments are aligned with your financial requirements.
Compiled by - Mugdha Bhansali