Most wait till the last minute to get cracking on their tax savings. Others ignore it. Few smart ones get cracking at the start of the financial year. Why don’t you be one of them?
At the start of this financial year, Morningstar.co.in will be advising investors how to legitimately minimise their tax bill and maximise their investment portfolio. We flag off this series by telling investors the benefits of starting their tax planning right away.
Step 1: Think of it as a financial planning exercise
Start by changing your perspective towards tax planning. Most of us rarely think about tax planning from an investment point of view. Ask yourself, have you ever really looked into the nature or type of the investment that you made for tax savings in detail? Does it fit well with your overall financial goals? More often than not, the answer is likely to be--No.
Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help you save tax and achieve your goals.
A systematic tax planning exercise will ensure disciplined and well informed investment decisions at your end.
Step 2: Start early
One needs to invest time and thought in the tax planning exercise. Most procrastinate and wait until the last minute. The result is a portfolio full of insurance schemes and investment decisions made in a tizzy.
Investing a little time and effort can go a long way in helping you achieve your financial goals and alleviating stress brought about my last minute pressure. Investors usually fail to give due attention to their tax planning until the last moment when the financial year is at its fag end. Tax planning should be considered as an ongoing process rather than a financial year-end activity.
Step 3: Calculate your tax liability
While you work on your tax planning exercise, it is very important for you to know what your tax liabilities are and accordingly work towards it. Admittedly, for individuals who are engaged in business activities, computing the tax liability at the start of the financial year might be easier said than done. However, individuals who have a relatively fixed income like salaried employees, understanding and computing the tax liability need not be a difficult task. Compute your tax liability well in advance so that you will know how much to invest to save tax. If you do not know how to compute your tax liability then it is prudent to engage the services of a tax expert.
Step 4: Choose the right avenues
To do so, you need to understand what instruments are out there to help you save tax and your risk capability with regards to investments. Investing without understanding one's risk appetite and the risk associated with a given asset class or investment avenue can be a recipe for disaster.
If you are a risk-averse investor, avenues such as the Public Provident Fund or National Savings Certificate might be more apt for you. Conversely, for an investor who doesn’t mind taking on risk in the quest for returns, equity linked savings schemes are more suitable.