Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals.
What tax planning is not...
- Tax Planning is NOT tax evasion. It involves sensible planning of your income sources and investments. It is not tax evasion which is illegal under Indian laws.
- Tax Planning is NOT just putting your money blindly into any 80C investments.
- Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances.
Planning taxes this year
a. You will have certain needs and goals to meet. Understand what those are and then figure out how to maximize tax efficiency in your effort to meet them. Tax planning should be a part of the overall financial planning that you must do.
For instance, you might be getting married and need to buy a house. In this situation you need to get insurance to protect you spouse if they are financially dependant upon you, as well as you need to get a home loan. What should you prioritize and what do you have the capacity to afford? If you blindly put money into an insurance policy, it might not even be sufficient to give you adequate insurance cover. However, if you choose to pay off the principal on your home loan, that could be a better option in this situation.
b. Do not blindly invest money with the the first agent that you might come across. You might end up making mistakes. A lot of people end up buying insurance policies with minimal insurance coverage or putting money in instruments where they cannot access the money when they need it.
c. Do not make last minute decisions just because your payroll department has reminded you that the internal deadline for submitting proofs is approaching. Tax planning involves planning in advance to avoid the last minute scramble.
Selecting tax saving investments
You should think about the following criteria, before selecting your tax saving investments for the year:
- Liquidity: How quickly will you need the money? Will you need to access the money within the next year or two years or over what duration ?
None of the above instruments let you withdraw your money quickly, in fact there is a minimum three year lock in for all tax saving investments. - Risk and Return: How much risk do you want to take. There is a trade off between the two, some instruments are very low risk, but as a result they give low returns which are capped.
- Inflation protection: The instruments that give you a low return typically are the worst type of investments regarding inflation. This is important because many of the instruments give you a fixed rate of interest, and lock in your money for a long period. This is not a good protection against inflation.
- Tax Exemption: All tax saving investments under Section 80C are alike in one respect that they are tax exempt when they are invested. But they differ with respect to the tax on the income you earn from such an investment as well as the tax on the maturity of the investment
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