Timely Tax Planning and its Benefits

 

Have you felt a sense of rush or tension in the period Jan-March every year? Most people do, but the worst affected are those who haven’t got all the papers or documents of investments or savings ready for income tax computations and return filing. Although your company may deduct taxes during these months you will be relieved of all the last-minute rush if you plan your taxes and keep all your documents in order as far as possible.

Why is it important?

Tax planning is important for two broad reasons:-

• To ensure that tax deducted is correct
• To enable easier processing of tax return

Tax Deductions

Deductions are very important because most companies deduct taxes every month from your salary. The computation of tax would be similar but some companies would deduct every month, while others would deduct tax during the January to March quarter.

For example if Mr. Ashok earns an income on which his tax for the year works out to Rs.24,000. In this case the company would deduct Rs.2,000 every month. Tax deductions can influence your monthly salary and cash flows, so its important to give it more attention.

Tax Declarations

Most companies ask you to provide an estimate of your tax saving or investment or housing loan details to work out your estimated tax for the year.

Is it just a formality or is it important for you?

Its very important because your deductions would get influenced by the estimated taxable income, which will determine taxes.

In the above example Mr. Ashok made investments of Rs.1 lakh for which deduction is available. Ashok was explaining to his colleague Mr.Pratap that his tax estimate for the year would be approximately Rs.48,000, if he had not made those investments. Which means his tax outgo would have been almost Rs.4,000 (twice what he is paying), had he not planned his investments.

Tax Planning Process

The planning process and selection of savings/investment options should happen at the very beginning of the year – say in April or May. This is a smart way to avoid the last minute rush and resulting mistakes and poor decision making, which impacts your future.

 1. Check your income level

If your income is below the taxable limit of Rs.2 lakh (as per 2012-13 slab) then you don’t pay taxes, so there is no need for tax planning.

However, if your income is above the minimum 2 lakh limit, you have to think about tax minimization or reduction as far as possible.

 2. Investment, Savings and other options

You have to list down a set of financial investments, savings, etc which have tax benefit which can include:-

1. Life Insurance Plan
2. Equity Linked Savings Scheme (ELSS) / Tax Saving Funds
3. Interest Payment on Housing Loan
4. Principal Payment on Housing Loan
5. Tax Saving Bank Deposit
6. Infrastructure Funds
7. Other options

In the month of April, May or June you can think, analyze and take a decision on which of the above options you want to pick.

Points to remember

1. Don’t choose a product/investment solely for tax saving purpose. Make sure it suits your needs and provides other benefits. Tax saving should only be an icing on the cake.
2. Wrong product choice for the sake of tax saving can cause issues such as liquidity issues, poor returns, long lock-in period, etc.
3. Ensure that you have the receipts/bills or statements ready for submission to your company for appropriate deductions
4. In case of investments or insurance try to have the originals and one copy of the important receipts or proof of subscription
5. In case of housing loan EMIs most banks provide provisional statement showing actual payments and estimated payments (actual for April – Dec and estimated payments for Jan – Mar)

Don’t postpone your decision till year end because you might end up choosing wrong product or scheme due to the urgency and hurry to meet the deadlines.

Proof of additional incomes or additional savings not accounted in Step 2

If you are a salaried individual with only one source of income namely salary, then you will need this step only in case you missed any investments on which tax deductions are applicable.

For example if you invested Rs.20,000 in infrastructure bonds on which tax deduction is applicable. Lets assume a case where your employer has not taken this in to consideration because you did not submit documents. What next?

In this case you can claim this deduction in your tax returns and get a refund. This point needs to be kept in mind when you prepare tax returns post March 31st every year.

• If you have done Step 2 accurately and only have salary income you are fully on track. Congratulations!
• If you earn additional incomes – either professional income, income from property/house, business income etc., then these have to be taken in to account in your tax returns.

What is Tax Return?

This is the form filled by all tax assesses who are liable for tax. You are responsible and accountable for filing your own tax returns. Your company or employer will not do it for you.

Most people think that once the taxes are deducted their tax formalities are over. This is a wrong assumption.Tax return is independent of your tax deduction or TDS. You have to file this return every year and maintain records of the same for future reference.

Tax returns are also useful documents which are generally requested by organization at the time of loan processing, visa processing, etc. Today, most banks and financial institutions insist on the PAN (Permanent Account Number) which is a unique number allotted to all income tax assesses.

What is a good time to start tax planning? Ideally time to start would be in the month of April or May. This will ensure that you can provide an estimate of your approximate investments/savings which will get accounted by your employer, which will reduce your TDS as in the case of Ashok’s example above.

Conclusion – Timely Tax Planning and its Benefits

However, its important not to save or invest in a product solely for tax benefit – rather look at other aspects. Subscribe to a product only if it suits your needs and provides benefits. If not you can look at various other options available.

Remember, that you cannot save tax beyond a certain limit, so just be content with reducing your tax outgo by a few thousands every month which can still be a significant savings that can help build your future investments.