Money Magazine - When Should you start your Tax Planning ?

Start your Tax Planning for March 31 2016 From Today !

You read it right. We are indeed talking about tax planning for the year 2016 and not 2015. Surprised? Don’t be. And all those who tell you that tax planning is a year-end activity are wrong.  In reality, tax planning is an activity, which should ideally be carried out during the start and not the end of the year.

In all likelihood, you would have just finished the task of investing for the purpose of tax saving in 2015 about a month back.

But just think about it. Doesn’t it make sense to start doing this activity from the very beginning of financial year (April 2015 and not March 2016)? When you keep delaying it till the very end, chances of making mistakes are quite high. Some of the common things that happen when investing for tax saving is delayed are:

•    You rush into investing in a tax saving instrument that you may not understand at all.
•    Liquidating some of the older investments to make current investments.
•    Using up part or all of the accumulated savings for tax-savings.
•    Compromising on specific life-stage needs and investing into the same tax saving investments that your colleagues, friends, or family members have invested in.

There are quite a few tax saving options that you can avail. A few important ones are discussed below:

1) Employee Provident Fund Contribution

For all salaried individuals, EPF contributions are mandatory and the annual deduction on this account can be estimated based on your basic salary.

2) Life Insurance Premiums

For once, just add up the life insurance premiums of all policies in force. In case you are planning to buy an additional life insurance policy, add up the tentative premium for that too, and you have the tentative annual figure of your eligible life insurance premium. And if you have invested / planning to invest in ULIPs, do not forget to add premiums for these too.

3) School Fees

Tuition fee paid for full-time education of two children in any school, college, and university is eligible for tax deductions. The approximate amount likely to be spent under this head can easily be estimated at the beginning of the year.

4) Principal Repayment of Home Loan

Request your home loan provider for a provisional certificate of interest, which has the amount of interest and principle component comprised in your total value of EMIs.

Once you are done with estimating the above amounts and still have some scope left for further tax-based investments, there are a few more options that you can go for. Some of the important ones are 5-year bank fixed deposits, PPF, NSC, ELSS, NPS and deposits under senior citizen schemes.

Now which one is suitable for your particular needs depends on your risk appetite, age and anticipated requirement of funds in future. For example, investments like ELSS would work well for people with a reasonably long time horizon. In terms of long-term returns, ELSS scores over all other forms of investments that are eligible under Section 80C.  Since it has a lock-in period of three years, gains made on ELSS are tax-free along with a better post tax return.

For an additional Rs. 50,000 deduction under NPS, as proposed in this budget, you could spread the same over the year.

So instead of worrying at the last moment, make a commitment that you will start preparing yourself for tax saving from right from the start. This will ensure that you not only plan well for your taxes, but also are able to save money for various life goals without making any mistakes associated with rushed-up investment activities.