Time for Tax Planning

In life, two things are certain – death and taxes! 31st March is less than Four months away and you surely now have adequate time to focus on one very important task for the financial year. Tax Planning! You have just about enough time to assess your financial records and plan investments for tax saving purposes. But don't get too comfortable just yet. Time is of the essence when it comes to tax planning and the remaining months will fly away soon. We don't want to end up in the middle of a lot of unfinished work, forced to make last-minute investments in sub-optimal instruments just to save tax. You may end up saving tax but will this investment align with your overall investment goals?

Let us not wait for March month and be done with all tax planning as early as possible. Last minute tax planning decisions, taken in haste often are not the ones most suitable for you. We would suggest it is time to start tax planning right away. The question now is how do we start?

Step one: Assessment of gross income

The IT department has identified five specific heads of income under which all income is classified. These are (a) Income from Salary (b) Income from House Property (c) Profits & gains from Business/Profession (d) Capital Gains & (e) Income from Other sources.

The first step is a fair assessment of the gross income for the financial year. You already have crossed over nine months and we believe you will have a fair bit of idea for income accruing in the remaining months. There is no need to arrive at an exact figure. An approximate figure is enough to know the income for the fiscal year. While arriving at the gross income, please do consider all incomes including things like interest on bank savings, interest earnings from investments made, rental income, etc.

Step two: Assessment of taxable liability

The next step is the computation of the net taxable income. For this, we will be taking into account the exemptions /deductions provided by the government for the above-mentioned income source. We will be also considering the tax saving avenues already used /invested in by us during this financial year. Just to highlight, the following things will have to be considered, subject to the taxation rules,

1. Investments made in tax saving instruments u/s 80C

2. Rent paid for residence

3. Insurance premiums paid

4. Home loan – interest and the capital amount repaid

5. Medical expenses for disease treatments

6. Expenditure on handicapped relatives

7. Other allowed deductions like tuition fees, donations, etc.

After arriving the net taxable income, depending on our income level and our personal profile (age + gender + tax entity type) a particular taxation slab will be applicable to us. This will help us arrive at the tax liability for the year.

Step three: Planning for tax saving

You now have a fair idea of the amount of taxable income and tax liability applicable as per tax slab to you. The next step starts with you deciding how much tax savings you want to do? The idea is to reduce your taxable income so that the tax liability decreases. Thus you will have to work out the right amount of investments to be made in approved instruments which are allowed as deductions...

Note that not every decision is driven by tax saving purpose. For example, taking insurance in itself is very crucial and the decision on it should be taken independently, irrespective of tax saving benefit available or not. Tax saving in insurance products must always be a secondary consideration, as a by-product. As such insurance requirements have to be discussed with your advisor, the sooner the better. Certain insurance premiums are allowed for deduction u/s 80D, 80DD and 80DDB.

We have finally arrived at the stage where we have to select the investment product(s) with the primary objective of tax saving. The most important section here is of 80C which has many approved investment avenues which collectively allow deduction of up to Rs.1,50,000/- from taxable income. The most popular investment instruments available here are...

• Mutual Fund Equity Linked Savings Scheme (ELSS)

• Contribution to Public Provident Fund (PPF) and Employee Provident Fund (EPF)

• Tax saving Fixed Deposits (5 years & above)

• National Savings Certificate (NSC)

• Pension Plans

• Others Investments like Sukanya Samriddhi Yojana (SSY), ULIPs, Senior Citizens' Savings Schemes (SCSS).

There are also some payments eligible for tax saving deductions u/s 80C which have to be considered, if any.

• Life Insurance premiums

• Home loan repayment (principal amount)

• Children's tuition fees

Further, there is also an additional deduction of Rs.50,000 available for investments made into NPS u/s 80CCD which is over and above the 80C limits.

The question now is what you will choose?

To decide we must see the advantages and disadvantages of our preferred products and also our own financial objectives. Parameters like liquidity (lock-in period), risks, returns potential and your existing investment asset allocation, can be considered to decide on the right investment instrument. Please note that even interest rates on government saving instruments are revised from time to time. How much net real returns over inflation can I expect from my returns? is something that you must question yourself.

We don't wanna push you towards any particular product, though we believe in ELSS as the ideal tax saving instrument u/s 80C. However, overall tax planning is a wide subject and we would suggest that you take the opportunity to sit with your financial advisor and make a fair assessment of the needs and then select the right instruments. It is also an opportunity to take an independent look at your insurance coverage, just in time before the end of the year.