The function of mitochondria and Newton’s third law may be imprinted in our memory permanently, but it takes only one day of adulting to realise that it may have been a better idea for our adolescent brains to have learnt how to manage taxes—or more to the point, where your money goes, why the government claims certain fractions of it, and how to get optimal returns on your investments. If you’ve been blindly signing the dotted line at the end of the financial year or nodding along diligently whenever the terms TDS or GST come up in casual conversation, the chilling reality is that you’re likely not the only one. As your DIY experiment for the day, do a quick show of hands in your extended friend circle, and chances are you’ll find a majority of the working crowd is sailing in the same boat as you.
If you are a working professional earning any form of income every month, it is time to usher in the upcoming financial year with a resolution to take charge of your money. To help decode the jargon, we called upon industry experts to portion out the basics in a handy, easy-to-understand guide. Read on, implement on your own personal finances and pass it on to a friend who needs it.
Know the taxes you’re paying
Priti Rathi, who founded the country’s financial planning app for women, Lxme, explains, “Salaried women working in organisations primarily pay income tax as per the tax slabs issued by the government every financial year. Professional women working as consultants and advisors are required to pay the Goods and Services Tax (GST) on the services they render. Other forms of notable taxes liable are taxes on business income, capital gains tax on certain investments, and property tax if you are a property owner. A lot of the other taxes you pay are usually included in the price you pay for products and services.” It is worthwhile to note that with the onset of the new financial year, the government has announced full tax rebate for individuals up to five lakhs.
Tax Deducted at Source (TDS) affects your in-hand salary
Rathi elaborates, “This is one of the crucial reasons why you don’t get receive the exact Cost To Company (CTC) specified on your job letter in your bank account each month. TDS is a system introduced by the Income Tax Department, where the entity responsible for making payments such as salary, commission, professional fees, interest or rent is liable to deduct a certain percentage of tax before making the full payment to the receiver. So if you’re a working woman, your company deducts the TDS before crediting the salary in your account. As the name suggests, the concept of TDS is to deduct tax at its source.
“Here’s an easy example to compute 10 per cent TDS for an assumed professional payment. Let’s say, Neha makes a payment of Rs 50,000 to Anisha as professional fees for her photography project, so Neha deducts a tax of Rs 5,000 and makes a net payment of Rs 45,000 (50,000 deducted by 5,000) to Anisha. The amount of Rs 5,000 deducted by Neha will be directly deposited by Neha to the credit of the government at the end of the financial year.” After letting the government babysit your money during the year, you can request Form 16A from the employer and submit it to the tax department to reclaim the amount.
Effective tax planning can help manage your finances
“You must wonder why the government takes away anywhere between five per cent to 30 per cent of your income. It can feel like you are being penalised for being an honest citizen of the country, but the taxes we pay fuel the growth of our nation and us, the citizens,” explains Rathi. She further adds, “With effective tax planning, the government also allows us to save a part of the tax we are liable to pay through various schemes and investment options. Tax planning is essentially reducing your tax liability, which also gives an opportunity for wealth creation or growing your saved money. Your financial plan is the master portfolio of all your savings and investments, and tax planning is an essential part of this. An efficient financial plan helps you achieve your monetary goals like travelling, buying a house, early retirement, child education or even flying lessons (if you have expensive hobbies) without compromising your present lifestyle.”
Calculate your payable tax before the deadline hits
Start by putting together all the paperwork, including every last invoice for any freelance jobs you may have taken up on the fly, and prepare a comprehensive list of all forms of income you’ve had during the financial year. “If you’re looking to get an understanding of how much you owe the government, instead of going to your accountant or financial advisor to assess your taxes, you can harness the power of internet. There are several tax calculators and platforms available online that help you manage and save your taxes through different income sources or evaluate which tax saving instrument can give you best returns. These calculators also consider tax deductions on home loans, education loans and other income expenditures,” says the Mumbai-based scion of the Anand Rathi Group.
Timely payment of taxes is essential
“The penalty on late filing of your income tax returns beyond the deadline of July 31 (unless the tax department extends it), will leave you liable to a maximum penalty of up to Rs 10,000. As per the new law, a penalty of Rs 5,000 will be levied if the return is filed after the due date but before December 31 of that year, and Rs 10,000 post December 31. However, as relief to small taxpayers, if your income is not more than five lakhs, the maximum penalty levied will be Rs 1,000,” Rathi says.
It is never too early to start investing money for the future
Aditi Kothari Desai, director and head of sales, marketing and e-Business, DSP Investment Managers, believes that sound investments are a crucial element for working women in their 20s and 30s. “The rule of thumb, especially when just starting out, is to allocate at least 20 per cent of one’s salary for investments, before dividing the rest for expenses and entertainment. Of course, as your salary grows, the percentage saved will grow larger, because your basic needs may not grow as much—although luxuries may eat into it a bit. For young women starting out, it is essential to consider the fact that you probably have a larger appetite for risk and longer time on the horizon, therefore you could consider investing a larger portion of your savings in equities; however, your financial advisor can help you make optimal investment decisions as well,” she says.
Setting long-term financial goals helps
“According to certain global statistics, at some point in their lives, 90 per cent of women will be entirely responsible for their financial welfare due to being single, divorced or widowed. It’s crucial to plan for the unforeseen, unfortunate events. In addition, families may have one joint plan for common financial goals like buying a house, children’s education, travel and other household expenses. But in the case of discretionary expenses, separate plans definitely come handy, so one does not judge or have control over the other in their spending habits. The pay-off comes in the form of more handbags, and fewer arguments. Working women can also choose to keep their dream trip, their dream wedding or even general wealth building as goalposts to aim for. Once you have a comprehensive understanding of the basics, working with an advisor can help you prioritise your goals and select the investments best suited for your goals,” Kothari Desai advises.
It is imperative to consider your personal threshold for risk when choosing investment plans
She further recommends, “The amount of risk you are able to bear is very personal, depending on each person’s circumstances and the stage they are at in their life. One important component in minimising risk is diversification, a technique that reduces risk by allocating your investments among various financial instruments (such as equity, debt, cash, gold, real estate, etc) and sectors (healthcare, technology, energy, etc). Diversification aims to maximise returns by investing in different areas that each react differently during certain events, and can help in reaching your long-term goals while minimising risk. Simply put, don’t put all your eggs in one basket.”