Every individual whose annual income is above Rs 2.5 lakh is required to pay taxes and file Income Tax Return (ITR). With the start of the New Year 2023, the tax clock has started ticking. Instead of taking taxation as a burden, timely tax planning can save you from the last-minute scramble to save on taxes. But what is the best time of the year for tax planning?
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“As per the saying, ‘The early bird catches the worm’; hence to reduce tax liability and save more on hard-earned money, a tax planning practice should be done from the start of the financial year,” says Abhishek Soni, co-founder & CEO of Tax2win, a part of Fisdom company.
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Taxes can consume a large portion of your hard-earned money if not planned well. “Unfortunately, this statement is very accurate for cases where even after knowing that tax payments are mandatory, we wait until the eleventh hour to undertake the tax planning process,” says Soni. That said, there are multiple benefits of planning your taxes from the start of the year.
Benefits of planning taxes from the beginning of the year
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According to the tax-expert, following are some top benefits of doing of planning your taxes at the start of the year.
Align your long-term financial goals with tax planning
Planning early can help you to align with your long-term financial goals, like buying a home, children’s education, retirement, etc. Many long-term investment plans have a lock-in period that you cannot exit. If you start investing early in these plans, you will have enough time to understand the pros and cons of each investment plan and earn high returns.
More time to understand the right tax-saving instruments
If you start planning early, you will have time to assess your financial goals and choose the right tax-saving instruments to fulfil these goals. There are numerous tax-saving instruments, and selecting one is a tedious task. If you start planning early, you will get enough time to understand each of these options and select one as per your income and risk appetite. Delaying tax planning to the last can lead to choosing the wrong ways to plan the taxes.
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Chance to earn higher returns
Tax planning done from the start can increase your chances of earning higher returns. So let us say if you start investing in ELSS and PPF schemes from the start of the year, you can earn more returns over the financial year. Also, in the case of ELSS, there are options for paying the amount via SIP or lump sum. Paying through SIP is better as it will give you the benefit of rupee cost averaging, smoothen out the market volatility, and earn higher returns.
Early planning will allow restructuring of the salary structure
If you start planning taxes earlier, you can even restructure your allowances if necessary. Once the tax-saving investment plan is ready from your side, the employers start deducting TDS from your salary. Planning earlier gives you enough time to understand the several available salary allowances you can benefit from. Additionally, if your employer allows it, you can ask them to alter your salary structure to save more taxes.
Avoid last-minute hassle
Leaving things for the end of the year can leave you puzzled and blank. In the hassle of gathering all the documents at the end and estimating the tax liability, you may end up making some mistakes. Estimating your tax liability at the start will help you ascertain how much your tax liability will be at the end of the year. This way, you can adjust your tax-saving investment steps every month or quarter.
Additionally, there are chances that you may be left out of funds by the end of the year. As it is not necessary that your financial condition remain the same throughout the year. Therefore planning taxes from the beginning of the year is always suggested.
Save yourself from penal interest
Taxpayers who have defaulted in payment of their advance tax liabilities have to pay penal interest which is 1 per cent per month under Section 234C and Section 234B. As a taxpayer, it is mandatory to pay advance tax if the total tax liability after TDS is more than Rs. 10,000 in a financial year. Planning taxes early can help you to calculate your advance tax early which will help in saving yourself from penal interest.
