Why planning your taxes in April is a good idea
Updated: Jun 8, 2020
It’s that time of the year when everyone is scrambling around to collect their investment proofs or worse still, making investments to avail tax benefits. If you find yourself in this position year on year, it’s time to stop and rethink.
Procrastinating tax-planning could have a significant impact on our long-term goal planning. In fact, some of us might also take a massive hit on our cashflow in March by virtue of huge tax cuts by our company, in case we are unable to meet our planned investments through the year.
Here are three reasons why tax planning in April makes super-sense:
1.Focus on your financial goals with tax-benefits as the cherry on top
Setting your short, medium and long-term goals is the first step to sensibly planning your finances. Most of the tax-saving investments are focussed on meeting long-term goals, either retirement or children’s education, and so on. An annual review of these goals at the beginning of the new financial year will set out the plan of action and ensure a disciplined approach. If you choose to make investments in tax-saving mutual funds, they serve as great tools to meet medium-term financial goals since they have a lock-in period of 3 months.
2.Better returns from investments
Investing at the beginning of the year in products like Public Provident Fund (PPF), National Pension Scheme (NPS) and Equity Linked Savings Scheme (ELSS) could yield a better return for the amount invested. The better performance is thanks to compounding, the longer the money is invested (a headstart of even a few months) can lead to additional returns.
Citing the PPF as an example – as per the PPF rules, the interest on PPF deposits is calculated on the minimum balance between the 5th and the end of every month. While the interest on PPF deposits is calculated and becomes due every month, it is finally credited only at the end of the financial year. Hence, a lumpsum deposit of ₹ 1.5 Lakhs before 5th April would ensure interest on the entire amount for the year.
3. Plan to cover for exemptions, over and above 80C deductions
Apart from 80C, there are other exemptions such as 80D for medical insurance, an additional ₹ 50,000 deductions under National Pension Scheme, 80E in respect of education loan, 80G in respect of donations made to recognised charitable institutions, and so on. These would be planned better at the beginning of the year, to ensure a smooth cash flow through the year.
Often the documentation for these, such as the NPS and details of loans, requires additional time. Putting these together at the end of the year could get challenging and stressful. Tax-planning is an integral part of managing finances; however, the broader focus must be to make disciplined investments to meet financial goals.
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