Source: The Economic Times.
Submitting your proposed investments forms for tax saving purposes? Take it seriously. It can help you manage your cash flows and investments better.
Submitting your proposed investments forms for tax saving purposes? Take it seriously. It can help you manage your cash flows and investments better.
Financially, April is a significant month. And, its not just because this is the first month of a new financial year. The financial deeds of the previous year also reflect significantly in this month. This is the time when an individual is either flush with year-end arrears credits/claims/reimbursements or in deep financial trouble due to heavy cuts on account of large end-of-year income tax payout. Proper planning can ensure that inflows come in earlier. Outflows too can be managed so as to prevent the year fund crunch. Huge year-end inflows and outgoes can both be detrimental. In some cases, large year-end inflows imply that money that could have been claimed earlier has been asked for much later. Getting cash late has an opportunity cost attached to it. On the other hand, large outflows at the end of the year mean that tax planning and execution is faulty. It results in a huge cash crunch in the first month of a new financial year.
Start planning early
For investments, the time to plan is right now. The fact that the salaried employees are required to submit their 'proposed investments' plan for this year to their offices makes this month all the more important. Cash flow and returns can be managed much better if some thought is given right at the beginning about the investments to be made during the year.
Identify investment options
It is true that the 'proposed investments' form is just a statement of intention and that actual tax liability is determined only on the basis of 'actual' investments. However, having a good idea of what investments you plan to make in the year can help you invest better and also ensure that you raise the right amount of money at the right time. For instance, if you want to take advantage of prevailing high interest rates in tax saving bank deposits you may have to arrange for the money very soon. In comparison, if you intend to invest in PPF, you may have room to do the investment over the year as the rates are unlikely to change. If you want to invest systematically in an ELSS over the year, you will know how much to set aside every month.
Estimate quantum under each head
Tax benefits are available under various heads. Estimating the amount under each head correctly can give you an idea right away of the extra/less cash you are likely to have in the course of the year. For instance, it is clear that rising interest rates will increase interest outgo on your floating rate home loan. So, a higher amount on this account will be deductible from your salary thereby lowering your tax liability. This may perhaps even drag you down to a lower tax slab (assuming of course that you still haven't touched the upper limit of Rs 1.5 lakh). This also applies to inflows as well. Your investment planning exercise should also take into account the fact that annual increments during the year may require additional tax saving investments during the year as higher wages will increase taxable income.
Account for changes in the budget
The budget presented in February each year makes changes in tax laws and rates. These changes are applicable from the new financial year. These changes can lead to an increase or decrease in the maximum/minimum limits for each investment option and eventually the tax liability. At times, new heads are introduced. For instance, the recently presented budget has increased the claim limits for medical insurance premium paid and allowed parents/spouses to claim relief for education loan taken for children/spouse respectively. Consciously accounting for such changes earlier can prevent over/under investment in any instrument.
Thus, if you plan to take an education loan for your child in this year and pay interest on it, you may not need to make Section 80C investments as your tax liability can be lowered by using Section 80E (the section that deals with interest on education loans). This will broaden the scope of possible investments - for the extra cash that you may have- beyond just tax saving instruments.
Start planning early
For investments, the time to plan is right now. The fact that the salaried employees are required to submit their 'proposed investments' plan for this year to their offices makes this month all the more important. Cash flow and returns can be managed much better if some thought is given right at the beginning about the investments to be made during the year.
Identify investment options
It is true that the 'proposed investments' form is just a statement of intention and that actual tax liability is determined only on the basis of 'actual' investments. However, having a good idea of what investments you plan to make in the year can help you invest better and also ensure that you raise the right amount of money at the right time. For instance, if you want to take advantage of prevailing high interest rates in tax saving bank deposits you may have to arrange for the money very soon. In comparison, if you intend to invest in PPF, you may have room to do the investment over the year as the rates are unlikely to change. If you want to invest systematically in an ELSS over the year, you will know how much to set aside every month.
Estimate quantum under each head
Tax benefits are available under various heads. Estimating the amount under each head correctly can give you an idea right away of the extra/less cash you are likely to have in the course of the year. For instance, it is clear that rising interest rates will increase interest outgo on your floating rate home loan. So, a higher amount on this account will be deductible from your salary thereby lowering your tax liability. This may perhaps even drag you down to a lower tax slab (assuming of course that you still haven't touched the upper limit of Rs 1.5 lakh). This also applies to inflows as well. Your investment planning exercise should also take into account the fact that annual increments during the year may require additional tax saving investments during the year as higher wages will increase taxable income.
Account for changes in the budget
The budget presented in February each year makes changes in tax laws and rates. These changes are applicable from the new financial year. These changes can lead to an increase or decrease in the maximum/minimum limits for each investment option and eventually the tax liability. At times, new heads are introduced. For instance, the recently presented budget has increased the claim limits for medical insurance premium paid and allowed parents/spouses to claim relief for education loan taken for children/spouse respectively. Consciously accounting for such changes earlier can prevent over/under investment in any instrument.
Thus, if you plan to take an education loan for your child in this year and pay interest on it, you may not need to make Section 80C investments as your tax liability can be lowered by using Section 80E (the section that deals with interest on education loans). This will broaden the scope of possible investments - for the extra cash that you may have- beyond just tax saving instruments.
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