Importance of tax saving
Tax season rolls in and your accountant calls you about the taxes that you owe. You realize that about 30% of your income is due in taxes! When you talk to a friend who makes the same income as you, he tells you that his tax liability is much lower. How has he done that? Probably through tax planning. When you understand the importance of saving tax and how to do it, you can save thousands in tax liabilities!
What is Tax Planning?
Tax planning is the process of analyzing your financial situation and creating a plan that enables you to pay the lowest taxes possible. Once you learn the benefits of tax saving and how you can go about achieving it, you can save considerable amounts in tax.
There is a huge difference between the tax that you owe before and after tax planning. When you plan your taxes efficiently, you will have a reasonable amount of money left over that you can then use for various other purposes such as investing, meeting your financial goals, or for emergency funds.
Read on to find out the importance and benefits of tax saving and how you can go about achieving it.
5 Reasons To Start Tax Planning Early @ICICIdirectOfficial
The Importance of Saving Tax
Saving money is the direct benefit of tax saving. However, apart from this, there are several other reasons why you should plan your taxes. Here are some points that will elaborate the importance of saving tax through judicious tax planning:
1. Legally Lower Your Taxes
Tax evasion is a crime that could land you in jail. It is also unethical to avoid paying taxes. While avoiding tax is a crime, there are legal ways in which you can reduce your tax liability. With tax planning, you can reduce the amount that you owe in taxes.
2. Increase Savings
There are different tax saving options available in India. Among them are certain investments that you can make to reduce your tax liability. For instance, if you invest in financial instruments outlined under Section 80C of the Income Tax Act, you can claim up to Rs. 1,50,000 in deductions. These investments include Public Provident Fund, Equity-Linked Saving Scheme, Fixed Deposits, etc. By investing in these, you can increase your long-term savings.
3. Insure Your Health
If you need an additional reason to buy health insurance for yourself, your spouse or your dependent parents, then you can save up to Rs. 75,000 by buying medical insurance! Under Section 80D of the Income Tax Act, you can claim deductions for medical insurance premiums that you pay. Medical insurance will cover your bases in case of health emergencies and can by themselves be a great way to save money. Since they double up as tax-saving instruments, you have an additional motive to invest in them.
4. Build a Financial Habit
Apart from saving money, tax planning can also help you build a financial habit. Usually, when you begin tax saving at the beginning of the financial year, you have enough time to space out your investments through the year. You can plan your investments and purchases according to your monthly income, thereby helping you develop a financial habit.
5. Meet Financial Goals
Another benefit of tax saving is that it will help you meet your mid-term and long-term financial goals. For instance, if you invest in Equity-Linked Savings Scheme, you can use the maturity amount after three years to make a down payment on a car or go on a foreign vacation. Investing in PPF can help you plan for your retirement 15 years down the line while saving taxes today.
6. Achieve Peace of Mind
We cannot stress the importance of saving tax in achieving peace of mind. When you plan your taxes in advance, you know exactly how much you will owe in taxes. There’s no chance of you missing out on tax payments and incurring fines. Also, you will be at peace knowing that you are paying the least amount possible in taxes. With the right financial planner, you can reduce your tax liability considerably.
When to Start Tax Planning?
Apart from knowing the importance and benefits of tax saving, it is also essential that you keep the timeline for tax planning in mind. The sooner you start tax planning, the better. The ideal time to start planning your taxes is at the beginning of the financial year. Otherwise, you will be forced to make last-minute decisions which may not be in your favour.
Also, it is wise to start tax planning with your first salary. Often, people think that if their income is low, tax planning does not make sense. However, if you fall in the taxation bracket, you should start tax planning right away. This will help you inculcate the financial habit early in your career and help you as the years go on.
The importance of tax saving cannot be emphasized enough. When you plan your taxes wisely, you can avoid legal tussles and reduce your tax liability. Apart from that, there are numerous other benefits of tax saving including prudent financial planning, building healthy financial habits, saving money, meeting financial goals, among others. Talk to a financial planner to start saving taxes now!
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