View quick summary You know it’s time. It’s April and your employer has asked you to submit I-T declaration. You understand that tax planning has to start at the beginning of the financial year. But, how do you go about it? Our tax expert CA Sudhir Kaushik shows you the way.
Misconceptions about Tax Planning
Most taxpayers confuse tax saving with tax planning. It is due to this misconception that they make mistakes. Saving and planning differ fundamentally in the very outlook with which they are pursued. People who do not plan perceive savings as short-term gains. On the other hand, tax planning is a much broader concept. It is a targeted approach to identify your needs, and claim tax benefits based on them.
Where are the major chunks of your money going? It could be rent; daily expenses like food and conveyance; or in savings instruments. It is important that these inputs are accounted for when you plan. That way, you consciously keep your expenses, investments, cash flow and salary package tax-efficient.
However, people take the opportunity to plan during Tax Declaration activity lightly. Just like many of us ignore our health and do not visit a doctor, we ignore our finances rather than consulting a professional. As a result, you may end up making investment mistakes. For instance, it makes no sense to invest a lakh in National Savings Certificate (NSC) year over year, when you could buy a home on loan with the same funds. Deduction on investment in NSC is limited to the Rs. 1 lakh limit within section 80C, and the interest earned on it is taxable. On the other hand, you build a asset by investing in a property and deduction on home loan interest is up to Rs. 1,50,000.
Personal Finance Planning: How to Plan Taxes?
As per a research by TaxSpanner, less than 5% salaried individuals are actually able to optimize their tax payment. Studying the methods used by them and adding our own expertise, we found that following the process below can help you be a part of the “smart” group.
- Estimating the value of your existing assets: Account for what you own. This may include the house you stay in, the balance in your bank account, gold jewelry, shares, bonds, etc.
- Assessing your liabilities: Make note of all your liabilities, including all the necessary expenses on your family. Add to this, any home loan, personal loan or credit card dues that need to be taken care of.
- Calculating your net worth: Subtract your liabilities from your assets to arrive at your net worth. Poor investment pattern or sudden expenses can lead to a decline in your inflation-adjusted net worth. Those with net worth more than Rs 30 lakh should check their liability of wealth tax.
- Goal-setting: Are you looking at buying a house? Would you like to travel abroad? Do you plan to retire at 50? Is your kid about to be admitted to the best school? These are some goals that are directly related to your finances. To achieve them, you need to figure out the savings you must have.
- Identifying gaps: Are you saving as much as you should be? Avoid short-term investments, which may return money in your hands, leading to spends. Invest for the long term, but beware that you are not over-investing.
- Filling the gaps: Be aware of the ROI vis-à-vis your goals. Stay in touch with any expected income (from property, shares, or maturity of an FD). This way, you’ll know where to invest, how much time you have to meet your goals, and what part of it needs to be met by the end of the Financial Year you are planning for.
Planning your finances is not a trivial task. Plus, the personal finance market in India has evolved to international levels. There are numerous products and services available, but you need to choose the one that fits you. That’s where the need for an expert comes to the fore. Professional assistance not only brings the knowledge of options you can avail, but also verifies the compliance side of the whole exercise. TaxOptimizer is one such service that assigns you a dedicated CA who handholds you throughout the year in articulating your goals and helping you achieve them. So, are you ready to control your money?