Welcome back, folks! We’re now in Week 4 of the Finshots Money Resolutions. In case you missed it, here’s Week 1 where we spoke about habits, Week 2 where we shared a budgeting template we custom-made for you, and Week 3 where we talked about increasing your income. Also, don’t forget to write to if you have any questions yeah?
Alright, now that we’ve got those basics out of the way, we have to turn our attention to something that pokes its nose into our lives once a year. Something we all hate doing. Income tax! We’d all love it if we could slip past the tax net, but, as Benjamin Franklin once said, there are only two things in life that are certain - death and taxes. And well…pay taxes we must!
But you know what hurts even more? Penalties! This year, I had to shell out quite a bit of money as added interest since I didn't pay my taxes on time. Why? Well, I had some extra income in the year and I kind of didn’t pay something called an “advance tax” (we’ll discuss this bit later). I could’ve taken a wonderful 3N/4D kind of holiday with that money. But oh well…
So let’s get to Resolution #4 - Planning our taxes better so that we can soften its blow. And so we don’t end up paying more than we should.
However, do keep in mind that each year when the Union Budget rolls along (typically on 1st February), a lot of these tax quirks could change!
How long will the exercise take? 🕰️
We’ve tried to cover a lot about taxes. But, this isn’t an exhaustive list of everything that you should do. If it was, you’d be figuring out taxes for the next 48 hours! This Resolution is something to get you started. And we have another spreadsheet for you!
Ready? Let’s begin Resolution #4!
Step 1: Have you thought about whether you’re better off under the new tax regime or the old one? If you’re raising your eyebrows, you’re not alone. Most people haven’t given it much thought. Sometimes it’s just easier to stick to the status quo, right?
But you need to make this choice.
If you opt for the new regime, all those tax saving sections like 80C or 80D won’t count. No exemptions like House Rent Allowance, no deductions under the various sections, nothing.
You also don’t have to worry when your employer asks you to fill up the form declaring your tax-saving investments every year! Nor do you have to lock in your money in investments and policies that don’t see the light of day till the moment you retire.
And this is how the two tax regimes look.
There is a big advantage you get from the old regime, though. You’ll be forced to save and invest just because you want to save tax. You might invest in the Public Provident Fund (PPF) which has a 15-year lock-in. And that means you’ll be saving for retirement. You could buy health insurance. And that helps you in case of hospitalisations.
Since these deductions are not available under the new tax regime, you could take a laissez-faire approach and your savings rate could plummet. We don’t want that, do we?
So, yeah, you need to figure out which tax regime makes sense for you. And remember, if you’re salaried, you get the choice to switch every year, But if you’re self-employed, you get the choice only once in your lifetime.
If you’re confused about which to choose, have a look at our income tax regime calculator. Thank us later! :D
Step 2: If you choose the new regime, you can avoid anything that screams “save tax by investing now”. But let’s say you decide that the old regime is better for you. Now you need to figure out how to save tax. There’s something that happens each year when we get closer to March. The number of advertisements by insurance companies pushing policies that will help you save tax skyrockets. Or the neighbouring insurance agent uncle drops by your house telling you why a “new” policy is the best for you. Even mutual funds start advertising their equity-linked savings schemes (ELSS). We panic and end up buying something that could be quite useless.
So, let’s attempt some more rationality in our tax planning. Don’t think of the exercise in isolation. Rather, think of it in terms of your overall financial plan. A lot of us (especially the young ‘uns, myself included) thumb our noses at the tried-and-tested PPF. But tell me something else that offers 7.1% interest (currently) that’s completely free of taxes?
And if you keep setting aside money in the PPF, you can create a safe nest egg for the future.
Many of us also jump at investing in the National Pension Scheme. Just because we can save taxes by investing up to ₹50,000 in this tool. But we don’t pause to think whether it really makes sense to lock our money up till the age of 60 by doing this. Or are we better off investing that money elsewhere? Maybe it’s the right product for you, maybe it isn’t. But you’ll need to put some thought into it before you take a call.
So take 5 minutes out now and look back at all the tax-saving investments you’ve done in the past. Did you buy/invest because someone forced you to? Are they linked to specific goals?
Step 3: Calculate your tax liability. Sure, your employer deducts a certain amount of tax every month and pays it to the government. But for many of us, income doesn’t come from just a salary anymore. It could be additional rental income. Or it could be income from your side projects. Like a venture baking those cookies and brownies. Any side hustle.
Take some of the folks at Finshots for instance. We have a stand-up comedian (who’s also the person who voices our podcast). He does live shows. And if he earns money on the side, then that income may be subject to tax.
So, if you owe more than ₹10,000 as taxes in a year, you will have to calculate how much tax you owe and pay bits and pieces of it every quarter. It’s called the advance tax. Do it on time and you won’t have to pay the extra money as I did.
Something extra for you 😊
Before we end this, keep in mind this tax planning calendar.
April - First, decide the tax regime for the financial year. If you choose the old one, begin your tax planning. Make sure you set aside an amount monthly that could go into the tax-saving instruments. Please don’t wait till the year-ending in March to do this. Also, if you’ve banked some money in fixed deposits, make sure you submit the Form15G/H to your bank. Otherwise, they’ll deduct some tax on the interest you earn.
May - This is when you typically get an email from your employer asking you to declare all the tax-saving investments you’re making during the year. Think carefully and don’t do it as just a tick in the box exercise.
June - Make sure you remind your employer of Form 16 - for the previous financial year. That’s the document that contains details of all the money you earned as salary along with the tax they’ve deducted and deposited with the government in your name (or rather, under your PAN). Oh, and if you have extra income (rent, share trading, freelancing), make sure you pay the first instalment of the Advance Tax by the 15th of June.
July - Typically, the 31st of July is the deadline to file your tax returns for the previous financial year. Sure, the government has been giving extensions almost every year, but why wait until the last moment? Put together all the statements and documents you need for this at least by the 1st week of July and file it off!
September - Time for the next instalment of your advance tax. Keep the 15th marked in your calendar.
December - Submit the proof of your investments to your employer. Also, it’s advance tax time again. Remember the 15th!
February - Keep an eye out on the Union Budget. Maybe the government will give you some tax incentives for the next year!
March - Do a quick check if there’s any tax-saving alternative you missed before the financial year ends. Also, don’t forget that the final instalment of your advance tax is due on the 15th!
A secret for you 🤐
What if the Income Tax Department suddenly decides that they want to take another look at the taxes you paid 5 years ago?
Well, they can’t. They have a period of 3 years (can go up to 6 years if there is search and seizure) within which they can knock at your doors and ask you questions about your taxes. Either way, make sure that all the documents you use for filing taxes — bank and insurance statements, Form 16s — are all saved for easy access. And keep it for at least the last 5 years, maybe? It even helps when you apply for visas.
The soundtrack to end it🎵
There can’t be a better track than Johny Cash crooning “After Taxes” from way back in the 1970s. If you haven’t heard it before, I don’t want to spoil the surprise, but here’s a bit from the song:
'Cause from those total wages earned
Down to that net amount that's due
I feel the painful sense of loss between the two
Coming up next week 📅
Before we get to investing our money, we need to think about protecting ourselves. Through insurance. Don’t miss it!
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