Like Rao, many taxpayers are running around to finish their tax-saving investments before the financial year ends. To be sure, tax planning is more than just utilising the various deductions under Section 80. It also includes planning capital gains in a way to minimise the tax outgo. Our cover story looks at smart tax moves that investors and taxpayers should make in the dying days of the financial year. Read on to know how these steps can benefit you.
Do you need to save at all?
Use this table to calculate how much more you need to save.
In the example, the individual needs to save only Rs 17,000 more under Sec 80C.
1. Claim full tax deduction
The tax saved pushes up the effective returns on tax saving investments
Before you start, calculate how much more you need to invest under Sec 80C. Many taxpayers may not be aware how much they have already invested or the various expenses that are eligible for deduction. For instance, tuition fees of up to two children can be claimed as a deduction under Section 80C. For many parents with school going children, this takes care of a large portion of their tax-saving limit without putting any pressure on the pocket. Use the table on this page to calculate how much you need to save. You might discover that your tax planning is nearly taken care of.
If you have not fully utilised the Rs 1.5 lakh limit under Sec 80C, or even the Rs 50,000 deduction for NPS contribution under Sec 80CCD(1b), it’s time to do so now. Tax filing portal Taxspanner estimates that almost 25% taxpayers who file returns do not utilise the deductions available to them. “One should try and maximise tax savings by availing deductions and exemptions. Why leave money on the table?” says Sudhir Kaushik, CEO and co-founder of Taxspanner.com.
Maximise the deduction
Borderline cases with income slightly over Rs 5 lakh stand to gain a lot from tax planning.
By investing Rs 50,000 more under Sec 80C, the taxpayer cuts his taxable income to Rs 5 lakh and claims full tax rebate under Sec 87A.
Look at it this way. The investment will give you a tax benefit of up to 20-30% depending on your income slab. Taxpayers like Rao, whose income is marginally above the Rs 5 lakh threshold, also stand to gain a lot. By investing Rs 66,000 more under Sec 80C, she will be able to reduce her net taxable income to Rs 5 lakh, thereby reducing her tax from Rs 26,500 to zero. Even without factoring in the return earned by the investment, Rao will gain 40% in the first year.
Supriya Rao, 24, IT Professional, Hyderabad
With a salary of Rs 48,000 a month, her taxable income was below Rs 5 lakh so she didn’t do any saving except Rs 34,000 in the PF But after she joined a new job at a salary of Rs 85,000 in February, her income rose to Rs 6.5 lakh. She must save Rs 66,000 more to escape tax.
Our advice: Given her age, Rao should ideally go for equity-oriented investments. But investing a large sum in ELSS funds is fraught with risk. Therefore, she should put Rs 30,000 in the PPF and the remaining Rs 36,000 in ELSS funds.
2. Redeem and reinvest
Redeem and reinvest or even take a loan to claim tax deduction
What if you don’t have enough liquidity? There are several ways to raise money, but the easiest way out is to withdraw from existing investments and reinvest the proceeds in tax-saving instruments. If you have ELSS funds that have completed the three-year lock-in period, just redeem them and reinvest the amount you have to save. Some financial planners may frown upon this strategy. Their contention is that one should stay invested for the long term and investments should be done out of incremental income. That’s true, but keep in mind that by reinvesting the redemption proceeds, you are not really withdrawing the investment. The entire exercise is meant only to help you claim tax deduction.
When redeeming regular equity or hybrid funds, keep in mind that if the investment has not completed one year, there could be tax implications. The PPF is a very appropriate source of the funds needed for tax saving investments. There is also no tax implication on withdrawals. But you can withdraw only after the sixth year and that too only 50% of the balance in the preceding year.
If redeeming investments is not possible, go for a short-term loan. One can borrow against insurance policies at 10%. Personal loans are costlier, but the borrower will still stand to gain from the tax saved. “Taxpayers should do a cost-benefit analysis. If an investment is not earning good returns, it is better to liquidate it and invest in tax-saving investments,” says Amit Maheshwari, Tax Partner at tax consultancy firm AKM Global.
Avinash Gupta, 38, Marketing manager, Gurgaon
Even after claiming HRA exemption and deduction of Rs 1.5 lakh for Section 80C investments and medical insurance for his family and parents, he still pays a high tax of over Rs 2 lakh on an income of Rs 18 lakh. He wants to save more tax.
Our advice: One way Gupta can reduce his tax is by investing in the NPS and claiming deduction under Section 80CCD(1b). A contribution of Rs 50,000 will cut his tax by Rs 15,600. But NPS will lock up his money till the time he retires.
Smart ways to raise money for tax savings
Withdraw from PPF
If you have a PPF account more than six years old, you can withdraw up to 50% of the balance in the preceding year. Takes 2-3 working days.
Redeem and reinvest in ELSS
ELSS funds that have completed the 3-year lock-in period can be redeemed and the amount reinvested to claim deduction. This is also possible in case of equity funds purchased more than a year ago. Takes 3-4 working days.
Loan against policies
LIC offers loans at 10-12% against insurance policies to policyholders. Though not the best option, this can be used if there is no other way. Takes 3-4 working days.
Take a short-term personal loan to save tax. Personal loans are not cheap so this is not the best option. Takes 1-2 days.
3. Avoid multi-year commitments
Such long-term investments should not be done in a hurry
With less than 10 days to go, the Rip Van Winkles of tax planning are sitting ducks for insurance missellers and unscrupulous bank relationship managers. Insurance agents try to force the customer into making a quick decision, but the golden rule is never to buy a life insurance policy in a hurry. “A life insurance plan should not be bought at the drop of a hat. Any investment that requires a multi-year commitment must be assessed in detail,” says Saraswathi Kasturirangan, Partner, Deloitte India.
One should assess the need for life insurance cover, his ability to service the premium for the full term and the features of the policy. With just 10 days to go, you may not have time for this scrutiny. So it is better to stick to easier to understand instruments such as tax-saving fixed deposits and small savings schemes. The PPF offers 7.1% tax free, but now that elections are out of the way, the government may cut the rate on small saving schemes. ELSS funds carry risk, but don’t require multi-year commitments and have a short lock-in period of three years. “ELSS funds score on tax benefits, returns and low lock-in periods. They offer high liquidity and can give better returns compared to other instruments such as NSCs and PPF,” says Dilshad Billimoria, Managing Director of Dilzer Consultants.
4. Choose the right tax regime
The new simplified tax regime has more tax slabs and lower tax rates
At the same time, it is understandable if someone is unable to spare enough money for tax savings. The past two years have been very difficult for some households. The salary cuts and Covid expenses have wiped out savings. If someone is facing a crunch and not able to save enough, she can opt for the new tax regime which has more slabs and lower rates of tax but does not allow any deduction or exemption. You don’t get to claim HRA exemption, or deduction for home loan interest, health insurance or investments under Sec 80C. Even the Rs 50,000 standard deduction offered to salaried taxpayers and pensioners is not allowed. “The new simplified tax regime is not tax efficient for people earning Rs 15 lakh and above,” says Kasturirangan of Deloitte. As a simple thumb rule, if you claim more than Rs 2 lakh in deductions and exemptions, don’t go for the new tax regime.
Old or new tax regime?
The following deductions are not available under the new tax regime.
Taxpayers who claim deduction of more than Rs 2 lakh will not gain under new regime.
5. Harvest gains and book losses
Book profits in stocks and equity funds for exemption of Rs 1 lakh
Mumbai-based Nimesh Parekh is a long-term investor in equities, but also churns his portfolio once in a while. “I keep booking profits to claim the exemption of Rs 1 lakh in a financial year for long-term gains from stocks and equity funds,” he says. He sold some stocks when markets were rallying in January and made handsome gains, but also lost money when the Ukraine crisis hit the markets.
If you have also made gains on your stocks and equity funds, book partial profits before 31 March and pocket tax-free gains of up to Rs 1 lakh. The same stocks and equity funds can be bought back again, but their price of acquisition for tax computation will be reset.
The same goes for capital losses. If you have been unlucky with some stocks (Paytm and Car Trade investors know exactly what this means), book losses now to adjust against gains from other investments. “Losses in some shares can be set off against gains from other capital assets,” says Maheshwari of AKM Global. But one should be aware of the set-off rules. Long-term capital losses can be set off only against long-term capital gains. But shortterm capital losses can be set off against short-term or long-term capital gains.
It is not difficult to find out your capital gains for the year. You can log on to your mutual fund or brokerage house and get a capital gains statement within minutes. A better idea is to get a consolidated statement from mutual fund transfer agency Computer Age Management Services. The statement is mailed to you within minutes of placing the request.
Nimesh Parekh, 44, Finance Professional, Mumbai
Though he is a long-term investor in stocks and mutual funds, Parekh has sold some of his holdings in the past one month. He wants to harvest the tax-free long-term capital gains of Rs 1 lakh on equities before the year ends and reinvest the money in the markets. He also plans to sell some debt funds.
Our advice: While it makes sense to harvest the Rs 1 lakh capital gains, Parekh should sell his non-equity funds after the end of the financial year. This way, he can claim an indexation benefit of one more year.
6. Buy now to get more indexation
Additional indexation benefit of one year if you buy before 31 March
It’s a good idea to stock up on debt funds and other non-equity schemes before the financial year ends. If the holding period is three years, you get the indexation benefit of three years. But if the holding period extends to the fourth financial year, you get an additional benefit of one more year. This is why it makes sense not to sell your debt funds right now but wait for the new financial year for indexation benefit of one more year.
One week delay can save 38% tax
Selling non-equity assets after 31 March will give indexation benefit of another financial year.
By waiting till the next financial year, investor saves Rs 11,764 in tax.
In fact, the equity and debt strategies can complement each other. Let us assume an investor is holding equity funds for more than a year and debt schemes for more than three years. Both will be treated as longterm capital assets for taxation. The investor should book profits of up to Rs 1 lakh in equity funds, and reinvest the redemption proceeds in debt funds before 31 March. After the financial year ends, he should sell his long-term debt fund holdings and reinvest in equity funds. He gains in three ways: harvests tax-free long-term gains of up to Rs 1 lakh in equity funds, invests in debt funds before the end of March to get indexation benefit for 2021-22, and gets extra indexation benefit of 2022-23 on long-term debt funds. This requires some financial jugglery and it is better to consult a tax expert before implementing this strategy.