April Is Better Than March For Tax Planning

(An updated re-post.) 31st March is gone! Is it the right time to talk planning about saving taxes? Many readers may be thinking on this line.

First of all, why is tax planning required? It is required to reduce our tax liabilities by the use of various tax exemptions, deductions, rebates and allowances permitted under the income tax law.

31st March is remembered by most citizens, as the date by which they have to make few investments to save tax under Sec. 80C of the Income Tax Act. This date is also crucial for the financial companies, as these have to meet the targets set for selling their products by this date. A relation of a sort gets developed between pressurized salesmen and the late investors in the hectic days close to 31st March.

Last minute tax planning is an age old practice that forces investors to make hasty and often wrong decisions. But the situation is not so for those who plan out and make their informed investments well in advance.

Tax Plan Is A Must At The Start Of Financial Year

  • Does a farmer have a right season to sow a crop for better yield? Or, does he get all well done at the time of harvesting? Yes, he has ‘Nature’ to tell him that ‘he dare not go off-season; he better start his farming activities at the right time and continue these well up to the harvesting season’.
  • But in the case of investors, ‘Nature’ is not there to guide him. Also, unlike a farmer, an investor can ‘still survive’ his random way, investing being an activity secondary to his main job.

We have crossed over 31st March, with a hope to evolve & find more informed investors who begin their tax planning in April, the beginning of the new financial year.

Yes, it needs to be in April! The truth is truth – April is the most right month to plan saving taxes. Following points will convince you about this fact, demonstrating it in a simple & clear way:

1) Investments, like farming activities, need to be made at the right times spread over 12 months of a financial year. Having a tax plan at the start of the financial year helps you make better decisions, and reduces the burden on your financials at the end of the financial year.

2) Investors should not make hasty investments in the name of saving some tax. In this process at the end of financial year, they end up parking money in wrong products which may have an adverse impact on their return prospects and also on their cash flows. In a hypothetical situation, if one has to choose a bad investment or pay more tax, it is better to pay more tax than to have a bad investment. A bad investment generally involves more costs or opportunity costs for a longer period than the cost of paying tax.

3) You may also tend to invest more than the required amount to save taxes, going in for certain financial instruments which are highly publicized/advertised in the last days of the financial year.

a) In a hurry, you may neglect to think beyond Sec. 80 C, and not consider other important sections under the IT Act that permit deductions to individual tax payers, like Sec. 80 CCG (Rajiv Gandhi Equity Saving Scheme), Sec. 80 D (Medical Insurance Premium), Sec. 24 (Interest Paid On Home Loan), etc.

b) You may even neglect to consider normally incurred expenditures which are available as tax breaks, like spending on your children’s tuition fees, house rent and family’s medical expenses.

4) It may also be better sometimes not to block a large amount to save a small amount of tax. For example, it is not a good idea to go in to save a small tax amount of Rs 4000/- (say) in the last days, by blocking Rs 40,000/- in an additional tax saving investment with some lock-in period, in a probable situation of a near-term liquidity constraint.

5) Tax planning must be subordinate to investment planning, which itself is a part of overall financial planning. When you are investing just to save tax, you are parting with money that you may otherwise manage better to earn superior returns. For example, if you purchase a policy just to save tax, you may be making a commitment to pay a large premium amount for the next 15-25 years. By not splitting your money between a term insurance cover and other better investment products like ELSS and PPF, you may be compromising on your required insurance cover and higher returns.

Let’s Make A Change In The New Financial Year…

If you are convinced about the above points, plan out your new financial year financially well, saving taxes the most right way. Prepare a good investment plan involving the right tax strategies through the year.

Do you agree with the above simple message? Leave your views in the comments section below.

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Sukhvinder S SidhuThe writer, Sukhvinder Sidhu, is a ‘SEBI registered Investment Adviser’ and a ‘Certified Financial PlannerCM’. He writes to contribute his bit to create financial awareness, so that readers take right personal finance decisions for a better financial life for themselves and their families.
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