Adequate tax planning in the first week of the financial year can help you reap rich rewards.
For taxpayers, March-end is a hectic period; rushing around to balance your books is a stressful task. And after all the running around to collect and submit documents, you might feel that April can be taken lightly.
But hold on, it's the month when you need to kick-start you tax planning for the coming financial year as well. And the earlier you begin, the better it is.
Interesting earnings: Investment in public provident fund (PPF) is very common among all the taxpayers. PPF is a 15-year scheme, where you can invest up to Rs 70,000 each year, to take the advantage of deduction under section 80C.
In fact, though the stocks markets have been giving good returns in the last few years and the government also allows you to invest in equity linked saving schemes (ELSS) under section 80C, the preferred option for many is still PPF.
The scheme pays an interest of 8 per cent a year and is tax-free in your hands. But remember that April 5 is the day when the interest is paid on the amount that is there in your account. In fact the monthly balance on the fifth day of every month is considered for interest rate payments.
This means that if you are able to put in the entire Rs 70,000 before April 5, you can earn interest for the entire year on this amount invested, in addition to the existing balance.
Also, since all the banks are closed for their account balancing on April 1, this means that PPF investors need to quickly put in that money at the start of the financial year itself.
Salaried action: For the salaried, besides investment planning for the entire year, the month of April also means submitting the proposed plan to their company's finance departments.
There is a tendency among many of us is to simply submit a random set of numbers in the declaration form to the company that such investments would be made. And at the end of year, you find that, not only have the investments not been made, but some even forget the numbers and allocation.
For instance, in the declaration form, you may have written that a total of Rs 1 lakh will be invested under Section 80C in PPF (Rs 50,000), ELSS (Rs 30,000) and five year fixed deposits (Rs 20,000). But at the end of the year, if you forget to invest then, either you will have to pull out a lump sum or suffer huge salary cuts.
Also, if there are some tax-saving investments that have been spread out over the year, then the specific amount required at various points in time has to be made available.
Accordingly, savings have to be planned as well. Further, if there is some home loan to be taken for a house purchase during the year, the impact of this can be calculated at the start of the year and mentioned properly.
Regular investments: If you are doing investment planning to save tax through systematic investment plans (SIPs), then start with them as early as possible. Otherwise, the numbers could easily go haywire.
This is because a shortfall in the number of installments would lead to increase in the tax liability or lump sum investment at the end of the year that could hurt your finances.
Payback time: During March and April, a lot of money comes back to investors in the form of dividends payout from companies and mutual funds. Also, a lot of other investments mature in this period.
For instance, a large number of fixed maturity plans (FMPs) of mutual funds that provide the double indexation benefit typically mature in April. Similarly amounts paid on maturity of insurance polices that have been taken in March will see the payouts coming in March/early April. Thus, there is a need to properly deploy these funds quickly and as early as possible.
Acting in April, thus, becomes very important for your finances and this can turn out to be quite profitable financially as well.
The writer is a certified financial planner
