5 Must-know steps for planning your taxes

Paying taxes at the end of financial year without any planning and preparation is a nightmare. Well, tougher than it looks! We are already in the last quarter of the FY19 and you think you’ve done with your tax filing and don’t have to bother about it again? Think again! There might be things you must be missing out. What are they? Follow this…

What is tax planning?

The most important part of the blog. In order to act upon for planning your taxes and that too want it to look as smooth as riding hot blade on butter, then you must read this. An exercise that needs to be performed by an assessee to ensure tax efficiency which includes satisfying their tax obligations through a legal term prescribed by Income Tax Act 2019 is called tax planning. An efficient tax planning allows you to make the optimum use of the various tax exemptions, deductions and benefits.

5 steps for smooth tax planning:

  • Calculate taxable amount-

Here comes what you need to do first. Initially calculate your tax payable out of your total income. This can be done by calculating your gross income and net taxable income. Tax applications are different for every income bracket. So you must be careful while calculating your final taxable amount that needs to be paid.

  • Avoid wasting hours on paper work-

There are many options available in market that carry the potential to lower your energy and time invested in such activities. Activities like filing, accounting, calculating bills, etc. may lead to chances of making mistakes thereby incurring penalties. And you would never want this to happen! Software dedicated for accounting would be the best option! Such tools are designed to automatically calculate payroll and file taxes within time saving the admin / user from penalties.

  • Create timelines-

There may arise chances that business owners acting as accountants for them may lose the track due to work load. For smooth taxation, it is necessary to regularly keep an update of monthly taxes. To save yourself from losing the track, set checkpoints. Keeping an eye on your tax filing throughout the year at some decided point can save you from getting mini heart attacks at the end of year. The tool for accounting discussed earlier comprises of features for setting notifications and alarms in order to remind you.

  • Assist yourself with an expert-

An expert here could be an accountant hired as freelancer or permanent or any accounting software that just needs one time investment and yours’ thereafter. Decision is yours. Whilst for small businesses or startups hiring freelancers could be a good decision, but it may vary depending on your business style. Assisting yourself in such attentive tasks helps you focus on other core jobs you are meant for thus reducing chances of errors.

  • Save taxes through domestic means-

There are entrepreneurs who run their businesses from home. Also there are people working from homes. So if you too run a business from your residential and not yet claimed for any tax relief / deductions, then what are you waiting for? It includes all types of assets like insurance, mortgage, electricity bills, and every other asset that could bring you relief according to terms.

How to save yourself from any tax nightmares?

According to Section-80C of Income Tax Act, earning individuals coming under bracket of 5LPA are exempted from paying any taxes. How? Investments! The section terms enables you to invest in popular areas like PPF (Public Provident Fund), NSC (National Saving Certificate), LIP (Life Insurance Premiums), etc. Investing in such areas can win you eligibility to deductions in tax payments.

What’s beyond 80C? – Don’t worry! There are lot of areas where you can invest other than areas mentioned in Section 80C. Sections like 80CCC, 80D, 80G, 80GGC and many other investing areas like pension fund of LICs, Medical insurances, donations to charities, contributing towards political parties respectively.

Therefore don’t be just restricted in looking for ways to save taxes under section 80. There exists lot of options beyond as well.

Parameters affecting the plan:

Well, investing in above discussed areas is just one side of coin. Other side has some factors which could make you alter your decisions. The major factors are as follows:

Age-

Earlier you start with investment, maximum the tenure is. Thus maximum the invested sum. Let’s understand this with a simple example. Assume Vinod and Akshay as two investors with age of 25 and 35 respectively with retirement age of 60. So what’s the investment tenure now for both of them? – 35 years for Vinod and 25 years for Akshay. Thus, invested amount also tends to decrease with reduced tenure. Simple!

Income-

The other parameter is your income. Higher the income is, willingness to take risk is. If your annual income is good enough to sustain loss sometimes, then you may invest in areas with high risks but good returns. Whereas, if your income is not that high, you may opt for other options like PPF, NSCs, where there are assured returns with least risks.

These were some parameters which you need to study about to take a decision for investments. Good luck!

Is ‘Stalling’ the biggest mistake in tax planning?

Stalling / Delaying – the root of improper tax planning. Delaying or stalling your decisions at one factor could make you lose your intended savings. Instead, do a healthy research on tax planning and move ahead. As mentioned earlier, “earlier you start, more you gain”.

Takeaway

Tax planning isn’t just about spreadsheets and filling details and paying tax blindly. It takes lot of planning and understanding of tax rules and terms. Effectively studying various parameters of tax system will save you from tax penalty. Don’t forget the lines mentioned in this blog and never ever hesitate to look out for tax relief methods from section 80C or other.

Good luck with your tax filing!

Author bio-

Ritik Singh writes about HR (Human Resource) software, cloud and enterprise technology. A dynamic content writer who writes for Pocket HRMS, a leading provider of cloud based HR software with inbuilt AI-powered HR chatbot (smHRty) to small and mid-sized businesses across India.

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