7 MinsJuly 30, 2021
How many of you think of tax saving or tax planning when you plan your investments? Many may think of tax
saving only when there is very little time left, i.e., closer to March. Instead, why not plan for it right
at the beginning of the financial
year? This will not just help you save tax, but also help in achieving your financial goals. You may be
spared from selecting sub-par investments due to lack of time.
Ideally, tax planning should be integrated with investment planning. Therefore, while
planning for your tax-saving instruments, you should also consider your current asset allocation,
assets and liabilities profile, your personal risk profile (based on your age, income and expenses, number
of dependants, etc), your financial goals and time in hand to achieve those goals.
Benefits of doing tax planning from the start of the financial year:
Gain from the power of compounding :
When you start early, you can choose tax-saving investments that match your needs. It may potentially earn
better tax-adjusted returns, and if followed diligently, will add to the power of compounding. On the other
hand, when you leave the decision
for the last minute, you may end up investing in an ad hoc manner earning sub-optimal returns.
If you have a relatively higher risk appetite, you could consider market linked instruments such as Equity Linked Saving Scheme (ELSS),
Unit-Linked Insurance Plan, National Pension
System (NPS), and Pension Funds for your tax-saving portfolio. Some of these could also help address your
long-term financial goal or retirement goal.
You may have a higher risk appetite if you meet some or all of these criteria: You are young, in the
accumulation phase of life, earning decent regular income; have limited liabilities and not many dependents
to support; have financial goals with
a time-horizon far ahead. One must do a proper risk profiling to understand the risk appetite and choose
proper investment avenue.
If, on the other hand, your risk appetite is low, you may consider non-market linked tax-saving instruments.
These could be 5-year tax saver FD,
Public Provident Fund (PPF),
(which can also be linked with a savings
account) National Savings
Certificate (NSC), Sukanya
Samriddhi Yojana (SSY), traditional insurance plans, Senior Citizen Savings Scheme (SCSS), etc. Some
of these may help address financial
goals such as your child’s future needs and your retirement. One must choose appropriately based on
the lock-in period and product features of the instrument.
You may have lower risk appetite if you meet some or all of these criteria: You are in the protection phase
of life (on the verge of retiring or already retired); do not have a regular source of income; not created
many assets; have dependent
family members to support; have financial goals that are not too far away. One must do a proper risk
profiling to understand the risk appetite and choose proper investment avenue.
In addition to these investments, a home loan offers tax benefit
(for principal repayment and interest) and an education loan offers tax benefit (for the
interest paid) under Section 80E of the Income Tax Act 1961. If your goals include owning your dream house
or your children’s higher education, one may consider availing these loans as it may help you achieve
the goals while saving tax at the same time.
Carry out tax planning beyond Section 80C – Please note that there’s more to tax
planning than investment instruments specified under Section 80C. The Income Tax Act, 1961 also gives
deduction for certain expenditures
such as medical insurance premium paid (Section 80D) for self, spouse, and dependent parents; money spent on
your medical treatment for certain specified diseases (80DDB); if you are a person suffering from a
specified disability (Section
80U); for maintenance paid including medical treatment of a handicapped dependent (Section 80DD); and money
donated to certain funds and charitable institutions for certain causes (under Section 80G). You could make
use of these deductions
among many others by starting early.
[Also Read: Tax Saving
Gifts To Yourself]
Facilitate optimising your salary structure to save tax – If you are a salaried
individual, provide a copy of your investment declaration to the Human Resource department at the beginning
of the financial year, indicating
the tax-saving investments you will make under Section 80C and the other deductions you would avail. A
thoughtful tax saving plan at the start of the year will ease this exercise. Subsequently, when you provide
the final submission (around
January or February), your employer will be able to deduct the right amount of tax, by way of Tax Deduction
at Source (TDS). This will make it easier for you to file your Income Tax Return (ITR). In short, your net
salary or take home would
be higher by declaring your tax saving investment correctly.
Furthermore, when choosing between the Old Tax Regime
and New Tax Regime ensure you save more tax and earn a higher Net Take Home (NTH) pay. Broadly,
if your gross income is Rs 10 lakh or above and you are utilising deductions under Section 80C, 80D, and
24(b) of the Income Tax Act, 1961, then you are better off under the older regime; it works in your favour
from a tax planning standpoint.
On the other hand, for individuals in the middle-income group, earning a gross income of say Rs 5 lakh; the
new regime may prove advantageous.
While the New Tax Regime offers lower income-tax rates, it is devoid of exemptions and deductions available
under various provisions of the Income-tax Act, 1961. This means when you choose the New Tax Regime, some of
the popular exemptions [such
as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc.] and deductions available under chapter VI
A of the Act that grant deductions under Section 80 [such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G,
80GG, 80GGA, 80GGC, etc.]
will have to be forgone. Only the deduction under Section 80CCD(2) [i.e. employer’s contribution on
account of an employee in a notified pension scheme] for individuals.
Even the Standard Deduction under Section 16 [which is currently Rs 50,000] available to salaried individuals
and the deduction under Section 24(b) is disallowed under the new tax regime.
Old tax regime is
beneficial for high-income earners
Particulars
| Old
Tax Regime (Rs)
| New
Tax Regime (Rs)
|
---|
Gross
Income
| 1,000,000
| 1,000,000
|
Deductions:
| | |
U/Sec:
80C
| 150,000
| -
|
U/Sec:
80D
| 25,000
| -
|
U/Sec:
24(b)
| 75,000
| -
|
| | |
Taxable
Income
| 750,000
| 1,000,000
|
| | |
Tax
Slab (Old)
| | |
0
to 2.5 Lakh
| -
| -
|
2.5
to 5 Lakh @ 5%
| 12,500
| -
|
5
Lacs to 10 Lakh @ 20%
| 50,000
| -
|
>
10 Lacs @ 30%
| -
| -
|
| | |
Tax
Slab (New)
| | |
0
to 5 Lakh
| -
| -
|
2.5
to 5 Lakh @ 5%
| -
| 12,500
|
5
to 7.5 Lakh @ 10%
| -
| 25,000
|
7.5
Lakh to 10 Lakh @ 15%
| -
| 37,500
|
10
Lakh to 12.5 Lakh @ 20%
| -
| -
|
12.5
Lakh to 15 Lakh @ 25%
| -
| -
|
15 Lakh @ 30%
| -
| -
|
| | |
Income
Tax
| 62,500
| 75,000
|
Cess
@ 4%
| 2,500
| 3,000
|
| | |
Total
Tax Outgo
| 65,000
| 78,000
|
(Source: PersonalFN Research)
The chance of errors is high and may invite undue stress when you postpone the tax planning exercise for the
last minute. Hence, in the interest of your wealth and health, begin your tax planning exercise today.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial
Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way.
Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred
by the reader for taking any financial decisions based on the contents and information. Please consult
your financial advisor before making any financial decision