Many salaried employees suddenly wake up in January and begin investing in various assets for tax planning for the financial year (which in India is from April to March of next year). They rush to take numerous insurance policies (usually from some LIC agent in their office) and by March they are pretty pissed out.
Reason: Almost all their salary for the three months (Jan/Feb/Mar) has gone to these unwanted tax savings and this is one of the main reason they begin to hate Income Tax.
It need not be like that. There is a reason it is called “tax planning“. The best time to begin planning your tax savings is in April – the beginning of the new financial year. Here’s why:
Easy on your pocket
If you split your investments into 12 months instead of trying to cram it all up in 3 months, the total outgo on your salary becomes manageable. Lets say your salary is Rs.50,000 per month and you have to invest Rs.1,00,000 in 80C. Investing Rs. 1 Lakh in 3 months is more than Rs.33,000 per month. While spread in 12 months is slightly above Rs.8300.
Which is easy? Taking home Rs.41700 per month for the entire year? or Rs. 16000 per month in the last 3 months? What would you do if you need some money for an emergency in February?
Which would you like? The first image? Or the second image?
Easy on your mind
Last minute rush can be taxing on your brain and you don’t want to be running all around the place to get your finance right. Especially if your Annual Performance Review is around the corner, you better spend all your creative power on your work and get a better pay raise than fighting the tax headache. Getting that higher salary can be much easier and more beneficial to the growth of your investments than you trying to save few hundreds of rupees here and there.
There is a saying “The best time to invest was Yesterday (or last year or 34 years back). The second best time to invest in today.” I have already shown you examples of how starting your investments early can make a significant difference to your retirement corpus. By beginning to invest today, your investments would be growing at a much faster rate than 90% of others around you. Remember this site is about getting richer than what you were yesterday, also richer than your friends/colleagues around you.
Investing in the correct products
Investment decisions cannot and should not be taken in a split second. You need to spend lot of time thinking about the various investments products and assets before putting your hard-earned money. Whatever asset classes you invest in, there will be a lot of volatility in the price – be in stocks, bonds, gold, real estate. Even your bank FD interest rates can change any day. When you have the time to think, you can invest your money in the correct products at the right time.
If you are young, majority of your investments should be equities. And equities is one of the most volatile asset. So what is the best method to invest in such products? Systematically. That is why mutual funds have monthly mode as the most common SIP (Systematic Investment Plan) option. If you put in your money every month, you are going to get on average much higher number of units than doing a lump sum payment.
Also if the markets are at the peak like in January 2008 you made a lump sum investment you would have gotten back your money only recently (after this election rally). You would have lost 6 whole years and that is a risk no one should take.
Remember these reasons when you think about tax planning or any investment for that matter. It is not that difficult as you can set almost everything up as automatic investments and you wouldn’t even have to think about it at all for the rest of the year.