As the end of the financial year approaches, it’s time to start thinking about smart tax planning for the next financial year. With the right strategies, you can reduce tax burden and maximize your savings. Here are some tips to help you get started. In this article we will explore the various ways of planning your tax efficiently.
For starters, review your income and expenses for the current financial year. This will help you determine how much you’ll need to set aside for taxes in the upcoming year. You should also review any changes to the tax code that may affect you.
If you’re a sole proprietor, you may be able to deduct business expenses from your taxable income. Make sure to keep track of any business-related expenses you incur throughout the year, such as office supplies, travel expenses, and advertising costs.
You may also be able to take advantage of tax credits, such as the earned income tax credit or the child tax credit. These credits can reduce your tax liability and help you save money. Finally, consider making charitable donations. Donations to qualified charities are tax-deductible and can help reduce your taxable income. By taking the time to review your income and expenses and taking advantage of tax credits and deductions, you can reduce your tax burden and maximize your savings.
In the case of employees, many only make their tax-saving investments after being instructed by their employers to submit supporting documents or receipts for their tax-saving investments during the tax year. Typically, at the beginning of each tax year, usually in April, employers ask employees to list the tax-saving investments or expenses they plan to make during the year. Towards the end of the year, in December or January, they then ask for vouchers or receipts for the planned investments declared at the beginning of the year.
If these documents are not presented, the employer will reduce the TDS in the last three months of the year, i.e., from January to March. This tax can be reclaimed on your tax return if you invest before the end of the tax year but fail to provide proof within the required time.
The chart given below can be referred to if you’ve still not made tax saving investments but plan on doing so.
The Math
First, you need to calculate how much you really need to invest. To do this, consider the various deductions to which you are entitled as a result of certain mandatory expenses or investments. For example, under Section 80C, under which you can claim a deduction of up to 1.5 lakhs, consider your employee’s provident fund (EPF) contribution, principal repayment on a home loan, and interest rates on tuition paid for up to two children, among other things. Once you have this number, you can invest to cover the shortfall.
For example, if the principal amount of your EPF and home loan is, say, ₹1.1 lakh, you will need to invest an additional ₹40,000 to realize your 80C benefit.
The Budget
Last-minute savings are likely to weigh on your finances, so create a tax-relevant investment budget for those three months. Consider your expenses, including your utilities and liabilities, to estimate how much you can save for investments. Let’s say you can save ₹20,000 every month.
However, for each Systematic Investment Plan (SIP) installment for an ELSS, the three-year vesting period is separate and begins on the date the SIP is debited from your account. So, if you invest in February 2021, the lockup ends in February 2024, while for the March 2021 rate, the lockup ends in March 2024.
Tax saving investments must be made according to your goals. It is therefore very important to choose the right instrument.
Selecting The Right Product
Time is short, but don’t rush into it or make the wrong investment decision. Analyze tax-saving investment products for four parameters in particular: liquidity or lock-in, expected return, capital risk and, of course, taxes. The best tax savings instruments enjoy tax-exempt (EEE) status. EEE means that an individual receives a tax benefit on investment, accumulation and repayment. EPF and Public Provident Fund (PPF) have EEA status.
However, both products have a long lock-up period. EPFi is a retirement product that only allows early withdrawals under certain circumstances, while PPF has a 15-year vesting period.
Making last-minute investments to save on taxes can be daunting, but we hope this article helped you!
It is recommended that you start your tax planning at the very beginning of the tax year. In this way, you avoid burdening your finances in the last few months of the financial year and can spread your investments more evenly.