Early tax planning why?

“Early Bird catches the worm” may sound very clichéd. The truth is that the earlier you do your tax planning the more it will benefit you. Though the financial year has just going to started and you are still in the midst of filing your returns for last year in coming financial planning, you must keep your ears to the ground for great tax planning opportunities that come along.

Why plan early

There are several merits to having your tax planning in place early. Here are some benefits:

Early tax planning helps you take advantage of the opportunities available throughout the year. For instance, now that the markets are at a low it would make sense to purchase units in any ULIP or ELSS fund since the price of the units will be lesser now.

Early planning helps you assess your tax burden in the year and one can pay advance tax accordingly.

Tax planning at a later stage can put a severe strain on the pocket since a largish amount has to be invested in one go.

Hidden tax planning you do throughout the year

You may not realize it but you are already doing your tax planning throughout the year. Though you may not be investing in tax-saving instruments, there are several expenses that are deductible and often go unnoticed in our calculations for tax planning. Here are some common expenses that can be used as tax-planning tools:

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Being charitable helps you too. Money donated to tax-approved charitable institutions is deductible to the extent of 50%, subject to conditions. Deduction of 100% is available in the case of payment to certain specified funds like Prime Minister’s National Relief Fund.

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Repayments of your home loan EMIs give you tax relief. As per the provisions contained in Section 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is permissible for every individual in respect of interest on loan for residential self-occupied house property. This interest on loan is allowed as a deduction irrespective of the person from whom you take the loan. Hence, even if you have taken a loan not from a banker but from a relative or your spouse, the interest payable on the loan would be eligible for tax rebate. The maximum amount of deduction as per Section 24 in respect of interest on loan for residential house property is Rs 1,50,000 per year.

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Parents can claim a deduction for tuition fees for a maximum of two children within the overall limit of Rs 1 lakh.

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Compulsory payments you may be making if you are salaried. They may be deduction towards PPF or EPF, payments in a pension plan and insurance those are directly paid from your salary. These payments can be used in your tax-saving calculations too.






The best tax saving instruments

After taking into account these hidden gems, if you have any deduction amount left then there is a vast choice of investments that the finance minister has laid down for you. Here is how to make the choice.

If you are below 30

Your tax investment should revolve round ULIP or ELSS mainly. It can be as high as 50%. Some part of it should be allocated to term insurance(which covers more insurance) and health insurance. You can also invest a part in retirement plans for retirement planning.

If you are between 30-45

Your insurance cover should increase with your responsibilities at least 25% of your tax-saving money should go to insurance. So, a higher amount needs to be allocated to life as well as health insurance. You need to maintain or increase your retirement planning with retirement planning. Simultaneously your exposure to mutual funds should not be more than 35%.

If you are between 45-60

If you fall in this age group then your focus should be in retirement products and Annuity. 50% of the amount can go towards this. Your ELSS must be at its lowest and you must maintain your life and health insurance cover.

If you are retired

Choose safe products that can be easily accessed. Fixed deposits fit the bill perfectly. You are likely to move to a lower tax bracket now so you can invest with greater ease.

Do remember that you have a long time ahead waiting for you upto 31st March, 2009 to make your investment in tax-saving instruments but surely it makes better sense to invest now, relax and save tax right now. You can also opt for making the investment not at one go but in installments.

If you have some small money available right now you may better invest now the money in tax saving instrument and as and when you have balance money available at your disposal then make investment at a later date but surely before 31st March, 2009.