Start your tax planning exercise now

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.

tax saving or tax planning


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 Bank FD, Public Provident Fund (PPF), 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