Last minute tax planning for salaried people

In a matter of days, the current Financial Year will come to an end. For a taxpayer, it is the time to evaluate your performance on your investment goals you set at the start of the year. Unfortunately, this is the time of the year when many start exploring options for tax saving investments to minimise their tax liability. And in this last moment rush, many ends up choosing the wrong option which they will probably regret in future. So, if you are among those who have planned and executed your tax saving investments through the year, pat your back if you met the target. However, if you didn’t, then it’s the time to make up for the shortfall. Failing to do so will mean that you will have to pay the taxes you could have easily escaped. All the procrastinators must know a few things before they scramble to find the right mix of the investment which will help them in achieving their financial goals as well as bring them the much-desired tax saving.

Analysing the pay structure for tax saving opportunity

One important thing to consider before you jump invest in tax saving investment options for reducing your tax dues is to review your pay structure and your household expenses first. Your salary may comprise of several allowances and perquisites like Leave Travel Allowance (LTA), House Rent Allowance (HRA), Medical Reimbursement, Uniform Allowance, Car Reimbursement, Telephone Reimbursement, Books and Periodicals, etc which may be claimed as tax exempt subject to submission of related proofs. But most of the employers stop accepting the related proofs towards the end of January. So now you may not be able to claim all these exemptions, but you can still claim few of them while filing your tax return to reduce the tax burden, e.g., HRA.

Tax benefit on your personal expenses

Apart from this, there are certain common personal expenses like children’s tuition fees, health insurance premiums, life insurance premium, interest on education loan, home loan EMIs (interest and principal repayment), medical expenses on the treatment of certain critical illness, expenses on maintenance and medical treatment of disabled person, etc. which are eligible for tax benefits. So your first aim should be utilising these exemptions and deductions to the fullest, before you jump to any other tax saving investment decision.

If you still have scope for further tax reduction then, you can look out for various deductions enumerated in section 80.

Insurance plans

Now, if you want to save tax further, there are several tax saving investment opportunities available under the basket of section 80C. However, it is very often seen that people consider only traditional endowment insurance or ULIPs as the preferred investment option under section 80C to save taxes. This is solely owing to the fact that insurance companies and agents try to push these products in their own interest and the taxpayer in the last minute rush just to reduce taxes, end up investing in it without carefully analysing the benefits of the plan. Remember, that the primary purpose of insurance is to provide you adequate risk cover, so give priority to term insurance plans. To save taxes, there are several other avenues available, which can give you far better returns on your investment. But before you take a decision to invest in a term plan, now ensure that you get it done before 31st March as you may have to undergo medical check-up, which can some time even lead to denying the coverage.

Let’s have a look at some of the best ones here.

• PPF & Sukanya Samriddhi Scheme
  While investment in EPF is mandatory, you can voluntary choose to invest in some other lucrative options. You can invest in PPF, which is considered as one of the best long-term tax saving scheme under section 80C as it earns best tax-free returns. Apart from this the parents who have a girl child less than 10 years of age and who wish to invest for her future Sukanya Samriddhi Scheme, which is providing 0.50% higher tax-free return than PPF, can consider it as very good investment avenue under the umbrella of section 80C. Both interest earned and maturity proceeds of PPF and Sukanya Samriddhi Scheme are fully exempt from tax. Further opening both of these accounts is very fast and easy. You just need to approach any nationalised bank or post office with one address proof and one identity proof. Once the account is opened, you can transfer the amount to these accounts immediately through electronic transfer.

   

• ELSS
  Next point of attraction is ELSS; it has the potential to offer you best return among all options available under section 80C. As the money you invest in ELSS gets locked in for three years, your risk is reduced significantly, but still it is riskier compared to other options under section 80C. ELSS returns are linked to market performance. It is suggested to invest in ELSS through SIP mode to reduce the risk. This is more so because the equity market is near to its all-time high, so we do not recommend to invest in bulk in ELSS. So, if you have a bit of risk appetite, this is arguably the best option for you to get good ROI while saving tax. While your investment qualifies for tax deduction, Dividends and long-term capital gains are also free from tax. Another advantage with ELSS is that it has shortest lock-in period under the category. Investing online in ELSS is very simple and fast if you are KYC compliant. Or if you have an existing online trading account you can purchase your desired ELSS plan instantly through it.

   

• NPS
  Those who are looking to plan their retirement NPS is also a good investment option for reducing your taxes. You get the tax deduction for both your contribution as well as your employer’s contributions under section 80CCD. As compared to most of the mutual funds or ULIP it manages your funds at the lowest charges (expenses ratio). What it means is, maximum of your contributions go in actual investment so naturally, it can provide better returns. Further 40% of the maturity proceeds generated are exempt from tax. The remaining 60% can also be saved from tax net if invested in an annuity plan. The only downside is it gets locked in till your retirement, and the rate of which you will be able to buy an annuity in future is also not certain. Earlier it was time-consuming to open an NPS account (PRAN), but not you can get the online NPS account in hours if you have a KYC compliant bank account with any of the empanelled banks or if you have your Aadhar linked to your bank account.

   

• Other Small Saving Schemes
  Other than these, there are several other options which qualify for section 80C deduction. These include National Savings Certificate, Senior Citizens Savings Scheme, five year post office time deposits, 5 year tax saving bank fixed deposits, Specified Government Bonds but for most of these, the interest you get from your investment is taxable reducing you effective ROI.

Education Loan
Tax benefits can also be claimed if you have an education loan or home loan. You can claim the interest you pay on the education loan taken for yourself, your spouse or your child as tax deduction without any upper limit. It is advisable to pay off the education loan on priority as it carries significantly high rate of interest.

Home Loan
Similarly, the principal component of your home loan EMIs can be claimed as deduction under section 80C while interest component can be claimed under section 24. Further the first time home buyers during the F.Y. 2016-17 can get an additional tax benefit of up to Rs. 50,000 under section 80EE for the interest paid on their housing loan. Tax deduction is also available on stamp duty and registration charges. So if you have an existing home loan and you still have further investment scope under 80C, you can prepay some of your home loan rather than ending up doing wrong investment decision in last minute rush.

Act of Charity
Your acts of charity or donations to various trusts, political parties and scientific and research institutions, make you eligible for tax deductions under section 80G, 80GGA, 80GGC. Just remember to obtain a tax exemption certificate from the institution & not to make donations exceeding more than Rs. 2,000 in cash.

Medical Insurance
If you have a health insurance plan for you and your family or your parents you can get tax deduction up to Rs. 60,000 on the premiums that you pay. If you don’t have insurance cover for your parents above 80 years of age and you are taking care of their medical bills, then you can reduce your taxable income by up to Rs. 30,000. If you spend money on preventive healthcare, you become eligible for tax benefits of Rs. 5,000. All these benefits are covered in section 80D which provide maximum deductions up to Rs. 60,000. Again remember if you are planning to buy an insurance plan afresh then you should be able to complete the related formalities before 31stMarch. Also prefer online mode payment for depositing the premium as cheque clearing may delay the issuing of policy beyond 31stMarch disentailing you from tax benefits.

Medical Expenses for self or dependent
Further, if you are incurring expenses on medical treatment of certain specified disease for self or other dependent family members, then you can claim deduction up to Rs. 80,000 under section 80DDB, depending on the age of the patient. Also if you are a person with a physical disability or if you are taking care of any other dependent family member, suffering from disability then you can qualify for a deduction of up to Rs. 1,25,000 under section 80U or 80DD, depending on the nature of the disability.

Deduction for rent paid
Beyond this, if you are not a salaried taxpayer or even if you are in employment but not receiving any HRA then you can still claim a deduction of up to Rs. 60,000 p.a. under section 80GG, if you are staying in rented premises.

But before you make a last minute investment decision it is important to consider few very important points listed below:

• Additional amount you need to invest for saving taxes.
• Your immediate and midterm financial needs because most of these investments have a minimum lock-in of 5 years.
• The cost of borrowing of your existing loans v/s. post-tax expected return on your investment
• Objective of a particular investment
• Comparative analysis of the expected rate of return of different investment
• The minimum time you will require to execute (processing time) the investment decision as you have very less time in hand i.e. only 10days.

These are some of the best ways for salaried individuals to save their taxes. But remember that saving taxes is not a year-end activity. Taxpayers need to proactively plan and manage their tax profile from the beginning of the year to make maximum utilisation of all tax saving opportunities.

This article was first published on H&R Block India