Over 65% of tax-payers across the country scurry with their last minute tax related investments in the final four months of the year. While, obviously, early tax planning can help you avoid the rush of filing right before the due date, it can also provide a variety of other benefits. Efficient tax planning simply means to start the year knowing what will be tax deductible, identifying what income will be taxable and determining what moves you can make to get the best tax advantages throughout the year.
Early tax planning helps
To file right: Early tax planning avoids last-minute rush that can lead to computational errors or overlooked deductions and credits, especially if you do your own taxes at the last minute.
In avoiding penalties: You can avoid late penalty, as well as an interest charge through early tax planning and attention to deadlines.
In taking advantage of deductions and credits: Early planning lets you identify tax credits and deductions that you can take advantage of now, but won't have access to in the future.
In long-term tax planning:
Changes in your financial life, such as retirement or inheritance, have major tax implications that you can account for if you plan ahead. Estate planning and retirement planning can ensure that you don't lose more of your savings or estate to taxes than you need to.
In SIPing your way to taxplanning: Knowing your tax liability can efficiently help you participate in instruments like ELSS, RGESS, Ulips and PPF, spread over the entire 12 months, rather than struggle for funds in the last 3-4 months. For one it helps your cash balances, and at the same time it also gives fantastic rupee cost averaging opportunity.
In planning your losses: You should make the effort to know more about the rules to set-off your short-term and long term capital losses and you would be pleasantly surprised how losses can save you on taxes. In planning your loans: Plan when you can take that plunge into taking a home loan (with new sops thrown in - it just might make sense for new home buyers). Time the loan in such a way that you get the maximum benefit from the interest deductions.
In changing your entity structure: Create the optimal entity structure for your family and yourself through HUF and trusts to maximize your tax benefits and legal asset protection benefits.
How to get started on next year's tax planning
tCheck and review last year's return. This is to ensure you won't miss out on any deductions and credits in the current year.
tGet organized by setting up a simple file system, and separating your information by type, income, deductions, credits and so on.
tKeep track of all your expenses and retain receipts even though you don't necessarily have to submit them with your return.
tKeep more of your year-end pay cheques by equitably distributing the deductions across the 12 months.
tMake your tax payments on time if you are self-employed and required to pay tax instalments during the year. This way you'll also avoid interest and penalties.
tPerform a check-up on your financial health by reviewing your overall financial plan. It's easier to measure your results against objectives when every aspect of your financial life is laid out before you.
tConsider taking help of a professional tax preparer. It does cost some money but consider the amount you can save in taxes and anxiety. And in case of a dispute, your preparer can represent you at the Income Tax department.
tOne tax-saving strategy you shouldn't ever overlook: Be sure to talk to your professional adviser to ensure you take full advantage of every tax-reducing opportunity available to you.
Well, maybe it's a little too late to practise early tax preparation this fiscal. But try it out next year and you will certainly keep more of what you earn.
The writer is head
of wealth advisory services
at a south-based financial