Personal finance is all about creating a monthly surplus and investing regularly. A way to create a monthly surplus is also to plan for taxes. You may think that it is organised if you are a salaried individual. Your human resources team would send out an alert asking you to submit documents to prove your tax-saving instruments. Between the pay for three months to March, you would see an outgo for not only tax-saving instruments but also a higher tax deduction if you belong to a higher tax bracket.
That could create some kind of a liquidity crunch for a few months and hurt your ability to seize opportunities to invest appropriately. If that happens every year, you will lose a lot of money that would otherwise appreciate in 10 to 15 years.
The tax planning business is all in the head. People tend to make last-minute arrangements for meeting the section 80C or 80 CCD requirement. You then drop your money into some insurance policy or a unit-linked plan. Some of you may invest in equity-linked savings schemes of mutual funds. Most of you would buy fixed deposits or public provident fund schemes. All investments made at the last minute are unplanned. While they may give you the return as they are supposed to, there is a good chance that you could get your timing wrong.
If the stock market is at its peak, you will be buying equity assets at the highest value. If the stock market is at the bottom, you will buy low but miss out on using your discretion to buy the right equity assets. Poor financial planning and execution can eventually reduce the wealth you end up with.
Start in April
Tax planning should start from the first month of the financial year in April. You must do whatever is needed to save on tax for the year ending in March. However, starting with April, you should work with your financial advisor, plan and execute immediately. You will realise that you end up incorporating tax planning as a monthly exercise and not just a year-long one when you do that.
If you are salaried, it is much easier. You can start to rework your systematic investments into tax and non-tax schemes. Invest a small amount each month in a tax-saving instrument instead of doing it at the end of the financial year. If not done it yet, you may want to include both ELSS and the National Pension Scheme or NPS in your monthly financial plan. Do have a long conversation with your financial advisor.
If you are an independent professional or a gig-economy worker, you have to be more particular about tax planning. While you have the advantage to manage your expenses and saving on taxes, you cannot do that when your accountant flags your liability after the financial year ends.
You need to sit with your accountant and understand clearly the difference between tax avoidance and tax evasion. It is criminal to evade tax. You can avoid tax up to a particular level as permitted by the land laws. You must ensure that you have money to pay advance tax once a quarter. At the same time, if you are registered for goods and services tax, you have to pay that on time regularly. If you do not plan your finances, you lose opportunities to shore up your investments.
Plan of action
If you are new to the world of investments, you need to take professional help for financial planning. You need to sit with your advisor and define things you want to achieve from the annual plan. Besides setting aside money for specific long and short-term goals, you need to allocate tax planning each month. It is a good idea, to be honest with your advisor and help them give you the right advice. Tax planning could just turn out to be the best thing you did when you look back 15 years down the line.
Tax and non-tax schemes
If you are salaried, it is much easier. You can rework your systematic investments into tax and non-tax schemes. Invest a small amount each month in a tax-saving instrument instead of doing it at the end of the financial year. You may want to include ELSS, NPS in your plan
(The author is editor-in-chief at www.moneyminute.in)