Amit is a young interior designer and works on projects as a consultant. Though the financial year is drawing to a close, he has not yet completed his tax planning. The wealth manager from his bank, many mutual fund advisers and insurance agents have started pushing for various tax saving products, but Amit is not sure where to invest. He regrets the previous rushed approach of simply choosing the most convenient product option, which led to a higher tax liability, wrong product choice,delayed tax filings and imposition of penalties for wrong estimation of tax. He wonders if there are some basic things he can do to plan his taxes in a more systematic and organised manner.
Efficient tax planning can help Amit save a good amount of money over the long run. With smart tax planning, he can enjoy his income to the fullest and achieve his financial goals as well. An estimate of his annual income can help him compute his expected taxable income and liability. This is the ideal starting point for effective tax planning. Once Amit has a sense of his family’s expected tax liability, he can accordingly find ways to reduce it using tax saving instruments. For example, if he had a taxable income of Rs 15 lakh last year and he estimated a growth in net income of 20%, then his taxable income may also increase in that proportion. Therefore, he must make a tax saving plan early to avoid the last-minute flawed decisions.
Once Amit gets an idea about how much tax liability he may incur at the end of the year, he may be able to effectively plan his investment and expenses to save tax. For example, if he is expecting his taxable income to be Rs 15 lakh at the end of the year, he can start investing every month in tax-saving instruments like Ulips, endowment plans, PPF and ELSS. Early planning will give him more time to research and the options to choose from efficient tax-saving instruments. This will not only give him more liquidity but also higher returns at low risk and help him accomplish his financial goals in an effective way.
During the financial year, Amit may spend money on things for which he can claim deductions and save tax as he runs a consultancy business as a professional. He must keep the bills and receipts of all such transactions handy. It would be wise to maintain a diary for such transactions or keep them in respective mobile apps so that he can use it while filing tax, without any misrepresentation of facts. Once he has an estimated figure of the tax liability for the financial year, he should continuously assess the actual income and expense at regular intervals and make adjustments in his tax saving plans and advance tax payments accordingly.