On March 31, many taxpayers made last-minute investments to cut their tax burden for the outgoing financial year. In fact, most people often make such investments at the last minute, only to find later that some of those investment decisions that were made in haste, and therefore, aren’t quite suitable to their goals.
But that need not be your case. You could plan your investments well in time, and all through the year. The best time to make plans for your personal finance would be the beginning of a new financial year, starting April 1.
You could start organizing your finances by estimating your earnings for the year, and by knowing about your assets and liabilities. By gathering all such information, you would ultimately review your financial position. This process would help you to figure out how much money you have to save, invest, and spend.
Here are three steps to organize your personal finance in the new financial year from the tax perspective.
Financial And Retirement Goals
To begin with, evaluate your financial and retirement goals. Then, invest towards your goals in accordance with your risk appetite and time horizon. Depending on these two factors, you can choose between debt and/or equity investments. If you have a high risk appetite with a long-term investment horizon, you could choose to invest in equity shares or equity mutual funds.
“You could invest in equity-linked savings schemes (ELSS), which have a three-year lock-in period, and save on taxes by claiming up to Rs 1.5 lakh as deduction from your total income. You could also invest in Voluntary Provident Fund (VPF) and the National Pension System (NPS) for retirement. NPS allows you to adjust the risk as per your risk-taking capacity. You could also estimate their expenditures during the year, and evaluate if such investments would help you to save on taxes,” says Archit Gupta, founder and CEO, Cleartax, a tax portal.
If you are servicing a home loan, you can claim the interest paid on the home loan for up to Rs 2 lakh. The principal amount repaid is also allowed as deduction under Section 80C of the Income-tax Act, 1961 up to Rs 1.5 lakh.
Decide which tax regime is better for you. Taxpayers have the option to select between the old and the new tax regimes. The new tax regime allows taxpayers to pay taxes at a lower slab rate, though they need to forgo around 70 deductions allowed under the old tax regime.
“Choosing the tax regime at the start of the year instead of at the time of filing the income tax return helps in tax planning in a better way. The taxpayer can evaluate the amount of income tax as per the chosen tax regime, and comply with the income tax provisions, such as a declaration of investments to the employer, payment of advance tax liability, among others. If the employee decides to choose the new tax regime, he or she might not necessarily invest in income tax-saving instruments, but can choose other investment options,” adds Gupta.
Submit Tax Declarations
Submit the tax declarations on time for lower deduction of taxes. Taxpayers earning interest income from deposits with banks, but having total income less than the basic exemption limit can submit Form 15G or Form 15H for no tax deducted at source (TDS). Other taxpayers can submit Form 13 to the tax authorities for lower or no TDS deduction.
If you don’t plan your investments in advance, you also won’t be able to declare those to your employer. If you are not conversant with various financial instruments, that’s all the more reason to take time and understand what you need to invest in this financial year.