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Why Tax Planning Should Be an All-year Round Activity

When you begin your career, you may want to spend rather than save or invest your money.

  • Jul 24, 2019

When you begin your career, you may want to spend rather than save or invest your money. Planning your taxes also does not seem important until you start earning a higher income.

However, if you do not plan your taxes, you may unnecessarily pay money that may otherwise have been invested. Often, you may wait until the end of the financial year before you plan your taxes.

Generally, tax planning strategies and instruments are widely discussed during the last quarter of the financial year. However, making this a regular activity through the year has several benefits.

Benefits of Tax Planning throughout the year:

1. Combine investments with your income

When you are salaried, you receive a regular monthly income. Similarly, if you are a professional with retainer consulting, you will still receive regular earnings. However, if you are a business person, you may earn lump sum amounts at irregular intervals. Therefore, it is important to plan your taxes whenever you earn the income.

To maximize the benefits of tax planning under section 80C and 80D of the Income Tax Act, 1961, it is important to understand and evaluate all the available investment options. If you leave the planning until the end of the year, you may have insufficient time to evaluate different investment plans and may make inaccurate decisions.

2. Avoid delays in investment proof and refunds

Most companies do not consider investments done after the first week of February towards your tax savings. Based on the total investments, the company determines your total tax liability. Therefore, you may have to pay more taxes and then wait until later to file your returns and claim a tax refund.

Delay in tax planning has an opportunity cost. This is because you will have to wait for the refund when you delay your investments. If you did it regularly, you would have been able to invest the refund amount in an investment vehicle that offers better returns.

3. Benefit from rupee cost averaging

When you set aside a certain amount on a regular basis towards planning your taxes, you are able to benefit from rupee cost averaging. This allows you to reduce your overall cost of investment while giving the opportunity to ride through the market fluctuations.

The prices of several tax-saving instruments change during the year. Therefore, if you wait until the end of the year to invest and plan your taxes, you will have to invest a lump sum without considering the price. So, if the prices are higher, you may need to invest more compared to what you may need if you plan throughout the year.

4. Align long-term financial goals

When you develop a financial plan, you consider various life goals such as children’s education, retirement, and buying a home. When you undertake planning your taxes as a regular exercise, you are able to align your investments with products that help you to achieve your long-term financial goals. Some long-term investment products have a compulsory lock-in period during which you are unable to exit these. This helps you build financial discipline.

Waiting until the last minute is not healthy for your investment portfolio. Delay or inaccurate investment decisions may result in losing out on other beneficial opportunities that may have been helpful in building a higher corpus while reducing your tax liability.

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