Start your tax planning at the beginning of the year.

Good things come those who wait, No matter how captivating this phrase is. It surely doesn't apply to tax planning. When it comes to tax planning it is always advisable to start it from the beginning of the year rather than clustering it to the last quarter.

We at finpal always aim to be your one-stop solution for all your financial issues rather than just being an investment advisor. Our aim has always been to make your financial journey a hassle-free. One of the main aspects of managing personal finance is to manage your tax as it can have a great impact on all your income and goals.

Knowing how taxation can take away a major portion of your earnings. Taxes, if not planned properly can lead to fines and penalties for underpayment of tax along with interest and fee on late payments and filing of the return. Thus, it is prudent to start planning for your taxes from the beginning of the year rather than making it a year-end practice. 

Why should you start planning early?

Most of us realize the need to save on tax only towards the end of the year. At that time we might not have the full funds to invest in tax saving instruments. Planning early means you can allocate Rs 12,500 a month towards your savings under 80C. Also, don’t forget this is also the time your accounts department will cut your salary to make up for any shortfall in TDS that might have occurred during the year. So why risk losing out on this benefit just because you did not plan for it in advance?

Late planning of tax also means you might not pay your taxes on time. This will result in penalty charges as well as interest on the tax owed. Planning your taxes early ensures you have the time to also plan them efficiently. You can go into the minutest details.

Paying your taxes on time and filing your return on time can help you to get your refund faster. Yes, this is one of the less known advantages of paying your taxes on time.  If you have filed your return on time they will be processed on time and any refund due to you will be transferred to your bank account.

Where do I start from?

The key to efficient tax planning is to ensure that you smartly utilize the various deduction available under the income tax act.  The most common and easily available and those that you should be familiar with are deductions under section 80C and 80D. While section 80C allows you to claim a benefit of up to Rs. 1,50,000 per annum. Section 80D allows you a maximum benefit of Rs 25,000/50,000 per annum towards the medical insurance for you and your dependents. 

However, there are few other sections which can help you plan your taxes more efficiently. Like Interest paid on your home loan can be claimed as tax deduction u/s 24b of the income tax act or an extra deduction under section 80CCD (1b) of Rs.50,000 can be claimed over and above the limit of Rs. 1,50,000 of section 80C for the contribution of NPS. 

What are the best ways to utilize this limit of 80C?

Depending on what you have already done, your risk tolerance and past experience these can be your go-to options:

PPF/ EPF: it is a savings option offered through banks and post office and regulated by the government. The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years as per your wish. However, partial withdrawals are available from the PPF account from the Seventh year. Premature closure of a PPF account is allowed only under specific conditions such as expenditure towards medical treatment. For this, a PPF account must have completed at least five financial years.

PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in lump sum or in a maximum of 12 installments.

The interest rate on the PPF is revised every quarter and is benchmarked to yields on government securities. Currently, the PPF fetches an interest rate of 8%. In the PPF, you can maximize your returns by investing early in the financial year so that your deposits can earn interest for the entire year.

Apart from tax savings, PPF is a suitable option for conservative investors for their long term goals such as children's marriage or for a retirement corpus. 

ELSS or tax saving mutual funds: working on the basics of other mutual funds these funds have a lock-in of 3 years. You can fully or partially withdraw only after the said period of 3 years. 

The lock-in of three years also applies to SIPs. In other words, every SIP installment in an ELSS fund is subject to a three-year lock-in.

These funds provide you the best of both world, they offer a sustainable tax saving and since these are market linked they also provide a considerable capital appreciation on your investments. 

What if there is a delay or default in the payment of taxes?

Delay in filing the income tax return, non-payment or short payment of advance tax and non-payment or short payment of individual installment or installments of advance tax payment of Income Tax as per the tax calendar would result in a levy of late payment interest by the Income Tax Department as per Section 234A, 234B and 234C of the Income-Tax Act

The interest is payable 1 percent per month or part of a month under each of the three sections.

Effective from the financial year 2017-18, a late filing fee will be applicable for filing your returns after the due date i.e. 31 July 2018 under section 234F. The maximum penalty is Rs. 10,000.

If you file your ITR after the due date (31 July) but before 31 December, a penalty of Rs 5000 will be levied. For returns filed later than 31 December 2018, the penalty levied will be increased to Rs. 10,000. There is a relief given to small taxpayers – the IT department has stated that if the total income does not exceed Rs 5 lakh, the maximum penalty levied for delay will be Rs 1000