Have you begun your tax planning for this financial year?
If you wish to achieve your financial goals (such as children's education, buying your dream home and so on) in life, it is extremely important to undertake your tax planning exercise in a prudent manner. You must have heard of the saying, every penny saved, is a penny earned. Prudent tax planning can lead to saving taxes and also help you to meet your financial objectives.
However, a common mistake that most people make while undertaking their tax planning exercise is delaying it till the eleventh hour. This ultimately leads to mere tax saving rather than tax planning, which is a sub-optimal way of saving taxes. Another serious mistake which people make is choosing unsuitable options for saving tax. For instance, in their endeavour to save tax, some people get lured by insurance agents trying to sell them insurance-cum-investment plans (such as Unit Linked Insurance Plans, Endowment Plans etc.) and land up investing in them, even if these products are not suitable to them. Moreover, in their hurry to save tax, people miss out on options which are not only tax efficient but also help in generating suitable returns. They even fail to optimally utilise all options available for tax saving.
You see for prudent tax planning herein, are parameters which you must consider:
For your benefit, PersonalFN has listed down a list of major deductions available under essential Sections of the Income Tax Act, 1961:
- Age: Your age and the tenure of your investment play a vital role in your asset allocation. The younger you are, the more risk you can take and vice-a-versa. Hence, for prudent tax planning too, if you are young, you should allocate more towards market-linked tax saving instruments (such as Equity Linked Saving Schemes) as at a young age, the willingness to take risk is high. One may also consider taking a home loan at a younger age, as the number of years of repayment is more, along with your willingness to take risk being high.
Also a noteworthy point is, the earlier you start with your investments, the greater is the tenure you get while investing in an investment avenue, which can enable you to make more aggressive investments and create wealth over the long-term to meet your financial goals.
- Income: Similarly, if your income is high, your willingness to take risk is high. This thus can work in your favour, as you have sufficient annual Gross Total Income (GTI) which allows you to park more money towards market-linked tax saving investment instruments, for generating higher returns and creating a good corpus for your financial goal(s). Also, on account of the higher GTI your eligibility to take a home loan also increases, which can also help you to optimally reduce your tax liability.
Similarly, if your income is not high enough (i.e. it is low), and you do not want to put your money at risk; you can invest in tax saving instruments, which provide you assured returns. These instruments can be Public Provident Fund (PPF), 5-Yr Bank Fixed Deposits and so on.
- Financial goals: The financial goals which one sets in life, also influences the tax planning exercise. So, say for example your goal is retiring from work 5 years from now, then your tax saving investment portfolio will be also less skewed towards market-linked tax saving instruments, as you are quite near to your goal and your regular income will stop.
Likewise if you are many years away from the financial goal, you should ideally allocate maximum allocation to market linked tax saving instruments and less towards those tax saving instruments which provide you low assured returns.
- Risk Appetite: Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while doing your tax planning exercise. So, if your willingness to take risk is high (aggressive), you can skew your tax saving investment portfolio more towards the market-linked instruments. Similarly, if your willingness to take risk is relatively low (conservative), your tax saving investment portfolio can be skewed towards instruments which offer you assured returns, and if you are a moderate risk taker you can take a mix of 60:40 into market-linked tax saving instruments and assured return tax saving instruments respectively.
Options Galore - Snapshot of deductions
Note: The table above, is not exhaustive. It is vital for you as an assessee to take into account
||Quick Description of Deduction
||Life Insurance Premium, Public Provident Fund (PPF), Employees' Provident Fund (EPF), National Saving Certificate (NSC) , including accrued interest, 5-Year fixed deposits with banks and Post Office, Senior Citizens Savings Scheme (SCSS), National Pension System (NPS), Unit-Linked Insurance Plans (ULIPs), Equity Linked Savings Schemes (ELSS), Tuition fees paid for children's education (maximum 2 children), Principal repayment on Housing Loan
||Maximum upto Rs 1,50,000 p.a.
||Premium paid for medical insurance
||Maximum upto Rs 15,000 or Rs 20,000 in case of senior citizens. If you have paid medical insurance premium for your parents , you can claim an additional deduction of upto Rs 20,000, in case if parents are senior citizen or Rs 15,000 in other cases under this section. The maximum amount of exemption that can be availed by an individual is Rs 40,000
||Maintenance including medical treatment of a handicapped dependent who is a person with disability
||Rs 50,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 1,00,000 shall be allowed.
||Expenditure incurred in respect of medical treatment
||Actual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in case of senior citizen, whichever is lower
||Repayment of loan taken for pursuing higher education
||Maximum deduction for interest paid for a maximum of 8 years or till such interest is paid, whichever is earlier
||Donations to certain funds and charitable institutions
||Maximum deductions allowed can be 50% or 100% of the donation, subject to the stated limits as provided under this section
||Rent paid in respect of property occupied for residential use
||Maximum deduction allowed is least of the following: Rs 2,000 per month; 25% of total income; Excess of rent paid over 10% of total income
||Contribution made to any political parties or electoral trust
||Amount donated to political party is fully exempt
||Person suffering from specified disability(s)
||Rs 50,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 100,000 is allowed.
||Rajiv Gandhi Equity Savings Scheme (RGESS)
||Maximum deduction allowed is 50% of investment upto Rs 50,000, only for first time investors having total income of less than or equal to Rs 12,00,000
||Owning a property that is Let out Property (LOP) or considered Deemed to be Let out Property (DLOP)
||Flat deduction of 30% calculated on the NAV of the property
||Interest paid on the loan taken to purchase a house property
||In case of Self Occupied Property (SOP): Maximum of Rs 2,00,000 In case of LOP / DLOP: No restriction for deducting interest amount
all the deductions, exemptions and concessions while undertaking your tax planning exercise.
Likewise, those who are employed must also consider - House Rent Allowance (HRA), Leave Travel Concession (LTC), Education Allowance, Meal Allowance, Medical Reimbursements and ensure that your salary is optimally structured facilitating you to save tax.
Remember, that there's more to tax planning than just investment instruments specified under Section 80C.
PersonalFN is of the view that although you must take the help of a tax consultant while filing your returns and seek opinions from him, we also think that a self-study approach on your tax planning exercise is quite necessary as one should be well-versed with at least those tax provisions which affect us directly. Also, remember that, leaving the tax planning exercise for the eleventh hour can not only lead you to pay more taxes but also be hazardous to your financial well-being.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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