Income Tax: 5 reasons why you should plan your taxes at the beginning of the year

You cannot escape taxes if you are earning beyond a certain level. Then, why delay it? Many people find it a bane to pay taxes even when their annual income exceeds the stipulated ₹2.5 lakh level beyond which they must file their income tax returns (ITRs). The new year has already started, thus, requiring you to start things afresh, which includes planning your taxes already. 

Planning your tax-saving investments well in advance will ensure that you put your money in the right money-making options that will help you save on taxes too apart from relieving you of the unwanted last-minute hassle to save on taxes.

“A penny saved is a penny earned”, thus, implying that saving on taxes can be turned into an essential element of your regular savings habit. This also explains why you must not relegate your tax-planning tasks to your year-end list of activities. Planning your taxes at the start of the year has myriad benefits, some of them are:

Plan your taxes in sync with your financial goals

You invest to accumulate an amount to pay for your expenses in future. This can be for anything including buying a home, retirement planning, planning for children’s higher education or marriage, and more. Early planning can help you align with these long-term financial goals. 

However, not all long-term investments allow you similar benefits. Some also come with a lock-in period that you might not be able to exit before the due date even in case of an emergency. This underlines the importance of investing early so that there is more time for your investments to yield higher returns while you may also exit them if needed in the long run.

Learning about the right tax-saving instruments

Think of all the last-minute scramble that you go through while choosing between tax-saving instruments. Start early, and you will find more time to evaluate your financial goals and how each tax-saving instrument can help you achieve them faster.

Take, for example, insurance policies that act to save, invest and protect though it may take quite a prolonged period to arrive at that amount. Talk about other traditional plans like national savings certificates (NSCs) or the much talked about public provident fund (PPF) that ensure decent returns while lending the much-needed tax reprieve. Many people are now moving on to parking their money in equity-linked savings schemes (ELSS) that earn market-linked returns while helping to save on taxes too under Section 80C of the Income Tax Act, 1961.

To start with, you must ensure more time to assess your financial goals and select the appropriate tax-saving instruments accordingly. With so many tax-saving tools available, selecting the one that suits you best can be difficult. 

However, you will have enough time to learn about each of these options and choose the most appropriate one based on your income and risk tolerance if you start planning early. Tax planning that is postponed until the last minute may result in an incorrect choice of tax planning measures that serve as adequate investment tools too.

Increased scope for salary restructuring

Are you aware of the kinds of salary allowances that you may use to seek exemption from taxes? An advanced knowledge of tax planning can help you restructure your allowances in advance. You may then ask your employer for a different salary breakup to allow increased scope for tax exemption and a reprieve on your income. You can then plan the remaining investment options that allow you better savings on taxes. Once your tax-saving investment plan is complete, your employer will begin deducting TDS from your salary.

The advantage of amassing more wealth

“You start early, you gain more” is a fact that holds more ground than all investment advice put together. There is no doubt that tax planning from the start increases your chances of earning higher returns. This also means that if you start investing in ELSS and PPF schemes early in the year, you can earn higher returns over the course of the fiscal year. 

In the case of ELSS, the amount can be paid through systematic investment plans (SIPs) or small lump sum investments depending on your financial ability, though SIP payments are preferable because they allow you to take advantage of rupee cost averaging, smooth out market volatility and earn higher returns.

Escape from an unwanted penalty

Under Sections 234C and 234B, taxpayers who fail to pay their advance tax liabilities must pay penal interest at the rate of one per cent per month. The penalty interest is levied on the amount of unpaid advance tax. You must pay advance tax if your total tax liability after TDS is more than ₹10,000 in a fiscal year. Tax planning ahead of time can assist you in calculating your advance tax and saving yourself from penal interest.

Leaving things until the end of the year can perplex you. One, you may make mistakes while collating all of the documents to check for your income, while the confusion surrounding your tax liability may leave you bewildered. Estimating your tax liability early will allow you enough time to determine your net tax liability when it is due. You can then adjust your tax-saving investment steps every month or quarter this way. 

Furthermore, there is a chance that you will be out of money by the end of the year. Because it is not necessary for your financial situation to remain constant throughout the year. As a result, planning taxes from the start of the year is always advised.