Amit is a young interior designer and works as a consultant on projects. Although the fiscal year is coming to an end, he has not yet completed his tax planning. His bank’s asset manager, many mutual fund advisors and insurance agents have started pushing for various tax savings products, but Amit isn’t sure where to invest. He regrets the previous hasty approach of simply choosing the most convenient product option, resulting in higher tax liability, incorrect product selection, late tax returns and penalties for incorrect tax estimates. He wonders if there are some basic things he can do to make his taxes more systematic and organized.
Efficient tax planning can help Amit save a lot of money in the long term. With intelligent tax planning, he can enjoy his income to the fullest and also achieve his financial goals. An estimate of his annual income can help him calculate his expected taxable income and liability. This is the ideal starting point for effective tax planning. As soon as Amit has a feeling for his family’s expected tax liability, he can accordingly find ways to reduce it with the help of tax saving instruments. For example, if he had a taxable income of Rs 15 lakh last year and estimated net income to grow by 20%, his taxable income may also increase in that proportion. Therefore, he has to create a tax savings plan early on in order to avoid wrong decisions at the last minute.
Once Amit has an idea of how much tax liability he might have at the end of the year, he may be able to plan his investments and expenses effectively to save taxes. For example, if he expects his taxable income to be Rs 15 lakh by the end of the year, he can invest in tax-saving instruments such as Ulips, Foundation Plans, PPF and ELSS every month. By planning early, he has more time for research and the opportunity to choose from efficient tax saving instruments. This not only gives him more liquidity, but also higher returns with low risk and helps him achieve his financial goals effectively.
During the fiscal year, Amit can spend money on things for which he can claim deductions and save taxes if he runs a consulting company as a professional. He has to keep the bills and receipts of all these transactions at hand. It would be advisable to keep a journal of such transactions or to save them in the respective mobile apps so that he can use it when filing taxes without misrepresenting facts. Once he has an estimated tax liability for the fiscal year, he should periodically continuously evaluate actual income and expenses and adjust his tax savings plans and advance tax payments accordingly.
(The content of this page was kindly provided by the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)