x

Tame Your Taxes

Home »  Magazine »  Tame Your Taxes
Tame Your Taxes
Tame Your Taxes
Anagh Pal - 24 May 2019

Every year as the end of the financial year approaches, the scramble for paperwork begins. If you identify with this annual ritual, you are not alone. But a little advance planning is all it takes to manage your taxes better.

 

Know your taxable income

At the outset, it is important to get a comprehensive idea of your total income during the financial year. Depending on that, you will fall under one of the tax slabs.

There are several ways to reduce incidence of tax. “There are certain incomes that are not eligible for deductions or exemptions and there are some specific incomes which are only eligible for certain exemptions,” says Rakesh Bhargava, Director, Taxmann.  After applying these, one can arrive at the net taxable income.

This is where tax planning comes in. Tax planning is a process through which an assessee can reduce his tax liability by availing permissible allowances, deductions, concessional rates, exemptions and rebates under the statute of the Income Tax Act.

Start planning early

For financial year 2017-2018, you would have filed your income tax by July 31. If you haven’t already, it is time to start the tax planning process for the financial year 2018-2019 right away.  Investments are not supposed to be a one-time activity, but a continuous and year-long process. Bhargava says that some investments should be made before the financial year ends, while some exemptions and deductions are allowed, even if investments are made in the subsequent year, but before filing tax returns. Knowing the time limit for every exemption or deduction in advance helps one to plan taxes better.

 

Align tax planning to  your goals

One of the popular segments, under tax planning is Section 80C of the Income Tax Act.  “This Act prescribes certain investment avenues which allow you to claim a tax break of up to Rs1.5 lakh from your total income,” says Archit Gupta, founder and Chief Executive Officer, Cleartax.

There are many tax saving investments that one can make under Section 80 C.

With several options available, one needs to plan how to use the Rs1.5 lakh exemption. One should remember that the purpose of investments is to secure one’s future or meet a financial goal that will arise in the future. Here one needs to look at the characteristics of the various investment options available.

All investments that can be claimed as a tax deduction are to be made with a long-term goal, i.e. they have a lock-in period. For example, Equity Linked Savings Scheme (ELSS) has a lock-in period of three  years while tax saver fixed deposits have a lock-in period of five years. Public Provident Fund (PPF) has a lock-in period of 15 years. “Selecting tax savings investments depends upon one’s objective - whether one wants to generate income or one wants capital appreciation,” says Homi Mistry, Partner, Deloitte India.

Agrees Bhargava, “One should identify the financial goals before committing any funds. These goals vary from person to person depending upon their age, marital status or financial position.”

Prajjwal Kaushik, Chartered Accountant - Finance Editor at CAclubindia.com, says that one should keep the following four aspects in mind while planning investments:

How can I achieve optimum tax savings?

Ensure minimum risk

Maintaining low cost of investments

Returns based on the financial goals

 

The case for ELSS

“Fixed-income havens like NSC and PPF deliver interest in the range of seven to eight per cent. In Sukanya Samriddhi Yojana, you earn a slightly higher interest of 8.1 per cent. For investors with a low-risk tolerance, PPF might be a suitable investment product.  As regards NSC, it fairs poorly because returns are taxable,” says Gupta. PPF also works as the debt portion of your portfolio for a long-term goal, if you do not require liquidity. Plus the returns are tax-free.

ELSS is an equity mutual fund that invests in stocks of companies across sectors and market capitalisation. It also has the minimum lock-in period of three years compared to five and 10 years in NSC and 15 years in PPF. When compared to all the other options of tax deduction, ELSS has the potential to generate higher returns. “For risk seekers, taking exposure in equities becomes a primary consideration. As regards National Pension Scheme (NPS), it gives you a restricted exposure to equities, while with ULIPs your invested capital gets reduced by half as part of your invested amount is channeled into providing insurance protection. From this standpoint, ELSS can be an efficient product which gives higher returns. ELSS invests around 65-100 per cent of the funds into equities. This way, apart from the inherent tax advantage, it also enables wealth creation,” says Gupta. According to MorningStar India, ELSS as a category has delivered 17.79 per cent returns in five years. In this respect, ELSS is the right choice to meet long-term goals whether it is saving for children’s education or building a retirement corpus. “You must acquaint yourself with the process of identifying and selecting the right funds for this plan to materialise. It is recommended you do a thorough research before investing in an ELSS fund. You may incorporate the use of some quantitative and qualitative factors to pick funds for your portfolio,” says Gupta.

 

Deduction for life  insurance policies

Section 80 C includes deductions on premium paid towards life insurance policies. However, the entire premium paid towards such a policy is not eligible for deduction, but limited to the sum assured. Irrespective of the premium paid, the amount eligible for exemption is limited to 10 per cent of the sum assured. For policies issued before April 1 2012, it is up to 20 per cent of the sum assured. In case the individual suffers from a disability or a specified diseases, the limit is 15 per cent for policies issued after April 1 2012.

Deduction of premium paid for annuity plan of any insurer is also available for deduction under Section 80 CCC, which is a sub-section of Section 80 C.

Other deductions  under 80 C

 Certain expenditure regarding repayment of principal of housing loan and tuition fees are eligible for deduction under Section 80C. Contribution of an employee to a recognised provident fund is also available for deduction under this section. “Before you decide for any investment, consider your contribution to EPF and spending on repayment of principal of housing loan and tuition fees. If the limit of Rs150,000 is still not exhausted, you can opt to contribute to other investment avenues available in consultation with your financial advisor,” says Kuldip Kumar, Partner and Leader, Personal Tax, PwC India.

There is an additional deduction towards NPS to the extent of Rs50,000 of your contribution. This is over and above the Rs150,000 limit under Section 80 C. So once you have used up the 80 C deductions, you can consider investing in NPS with a long- term perspective.

 

Beyond 80 C

There are several other deductions to reduce incidence of taxes.

Medical insurance  (Section 80D)

This is one deduction that everyone should claim, for which medical insurance is a must. One needs to check whether an employer has covered an individual and his family under group medical insurance and for what amount.  If you do not find it sufficient and may like an additional insurance cover for your parents, then a tax rebate of Rs25,000 under Section 80D is avialable, says Kumar. Also, a higher deduction of Rs30,000 is allowed if you have made payment for senior citizen parents. Preventive health care is also included in this limit subject to a maximum of Rs50,000. Deduction can be claimed on medical expenses of senior citizens, too, if they are not covered under health insurance.

Assuming that one has availed the above deductions, tax liability of individuals whose income falls under different categories will be reduced significantly.

 

Additional deductions

There are other deductions available in special cases. If any payment has been made for the medical treatment of self or a dependent with a disability, a deduction can be claimed up to Rs75,000 (Rs125,000 in case of severe disability). If you are a resident and made any payment for medical treatment of self or spouse, children, parents, brothers/ sisters who are dependent on you in relation to the specified diseases, you can claim deduction up to Rs40,000. A higher deduction of Rs60,000 and Rs80,000 is allowed, if the dependent is a senior citizen or a very senior citizen, respectively.

 

Deduction for interest on education loans

Education loans are eligible for tax benefits, too. “If you have borrowed money for higher education from financial institutions or approved charitable institutions, you can claim deduction for interest paid on such loan if prescribed conditions are satisfied,” says Ashok Shah, Partner, NA Shah Associates.

Interest on home loan: If one invests in property by taking a loan, one can claim deduction of interest paid towards such home loan. “It depends on the type of property. If the property is used for one’s personal residence, then only up to Rs2,00,000 of interest payable can be set off against other income - salary, business and profession, capital gain and other sources,” says Mistry. If the property is rented, then any amount of payable interest which is not completely set off against rental income can be set off, but not more than Rs2,00,000 against other income – such as salary, business and profession, capital gain and other sources. Balance interest, if any, can be carried forward to subsequent years to be set off against rental income subject to limits.

Kumar says that it is possible to claim deduction on interest payment of a housing loan and HRA exemption simultaneously. “This provided both the houses are not in the same city and you are unable to reside in your own house due to reasons of employment and profession,” says Kumar.

 

Tax deduction for  charity donation

“If you do any charity during the year, check the receipt whether donation to such institution is eligible for deduction under Section 80G,” says Kumar. There are some donations which qualify for 100 per cent deduction while for others, it is 50 per cent of amount of donation.

 

Capital Gains Tax

Making profits on transactions of any capital asset makes you liable for paying taxes. Gupta says that this tax liability can be reduced by reinvesting the capital gains in another house property or reinvesting the sale proceeds on the sale of long-term capital asset subject to certain guidelines.

 

LTCG on the sale of  listed equity

Budget 2018 introduced 10 cent long-term capital gains tax on sale of listed equity shares, if the capital gains exceed Rs1 lakh. 

“For small-time investors, this is beneficial as it is unlikely for them to cross the Rs1 lakh threshold. However, if you anticipate a capital gain in excess of Rs1lakh in a given financial year, it is advisable to limit your transactions and postpone your sale or redemption to the subsequent financial year,” says Gupta.

There are other ways to avoid the LTCG too.

“Small investors can avail tax exemption on LTCG by opting for a systematic transfer plan or switching funds intelligently in a way that the overall gain in a financial year is below the Rs1 lakh threshold,” says Harsh Jain, Co-founder and COO of Groww.In, an online mutual fund platform.  Another option is to buy and sell equities or equity mutual funds just before reaching the upper limit, but that would come with brokerage charges.It is best to hold on to your equity or equity mutual fund portfolio.

 

Consult a tax advisor

The income tax department has published FAQs to guide taxpayers about heads of income, how tax will be calculated, and how returns can be filed on the e-filing portal. “Tax planning not only involves calculation of taxes, but ensures that the prescribed conditions are fulfilled and proper documents are maintained,” says Shah. For complex tax issues, it is advisable to consult a chartered accountant. Planning in advance will help you navigate the tax maze with ease, save some money and at times create wealth.

anaghpal@outlookindia.com

Be A Soorma Investor
How To Minimise The Tax You Pay