Quick tips to make effective last-minute tax planning
March, 28th 2019
With March drawing to an end, there is a rush for tax planning and tax-saving investments among those who missed doing it throughout the year. Poor tax planning often results in individuals paying taxes more than what they would have to if they had chosen the right investment strategies.
Here are a few ideas to help you take effective last-minute tax planning decisions.
Investments to utilise Section 80C/80CCC/80CCD Taxpayers are eligible to claim combined tax deductions under these sections with a maximum limit of Rs 1,50,000. Utilise the rebates available under these sections to the fullest by investing in any or a combination of the available investment options. Examples of such investment opportunities are
Equity Linked Savings Scheme (ELSS): ELSS is a diversified equity mutual fund which has a majority of the corpus invested in equities. Returns from an ELSS fund reflect returns from the equity markets. Investment can be made in lump sum. If you plan in advance, you can take the SIP route with a lock-in period of three years. It is considered one of the best investments as it has the potential to give returns of around 15% (based on past returns) along with tax deduction under Sec 80C to the maximum limit of Rs 1,50,000.
Public provident fund (PPF): It is a savings scheme introduced by the Ministry of Finance (MoF) with tax benefits. The scheme is fully guaranteed by the Central Government and provides a fixed rate of return of around 8 per cent, which is fixed every quarter.
Employee provident fund (EPF): EPF is a retirement benefit scheme that is available to all salaried employees. The employer deducts a minimum of 12 per cent of basic salary plus Dearness Allowances (DA) of employee and deposits in the EPF or other recognised provident fund. This amount can be higher than 12% as per employee discretion. The interest rate on the EPF is 8.55 per cent and the entire PF balance (including interest) is tax-free if withdrawn after continuous service service of 5 years.
National Pension Scheme (NPS): NPS is a pension scheme that has been started by the Indian Government to allow the unorganised sector and working professionals to have a pension after retirement. Returns rate on the NPS is equity market based and varies around 12 per cent to 14 per cent. Moreover, individuals can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B), which is in addition to Rs 1,50,000 permitted under Section 80C.
Some of the other areas where section 80C/80CCC/80CCD can be utilized for tax benefits are pension plans, life insurance policy, 5-year fixed deposits with banks and post office etc.
Utilise expenditures deductible under Section 80D/80DD/80DDB If you have spent your income on the treatment of specified diseases or treatment of handicapped dependents you are eligible to save tax on such expenditure. You can also buy medical insurance premium of self/spouse/children and parents to get a deduction of Rs 15,000 and Rs 20,000, respectively.
Save taxes by philanthropic activities A donation made for charity or philanthropic purposes can be claimed for tax deductions. This includes contributions to National Relief Funds, which can also be claimed as per Section 80G. Some donations get a 100% deduction while others get up to 50%, depending on the reason the donations were made. If you are left with additional corpus which you would like to utilize for philanthropic purposes, this is the best time as it will also also help you save taxes.
Note that only donations made in cash or cheque can be claimed for deductions. One is eligible to claim deductions if donations are made to the organizations as specified by the Ministry of Finance.
Common pitfalls in effective tax planning The probability of committing errors is high if you are doing last-minute tax planning. The chances of locking funds in an unsuitable tax saving investment are quite high. It is advised to be selective while investing in the opportunities available for tax-savings. Do not take decisions on an ad-hoc basis or for a short-term perspective.
Use the above-mentioned options to make the best of the limited time available for tax planning. Remember to avoid the last-minute stress, go into the new financial year by adopting a consistent and planned approach towards taxes throughout the year. Proper planning throughout the year would remove the stress of last-minute rush to identify and invest in tax-saving instruments and thus eliminate the need to accumulate lumpsum amount at the end of the financial year.
This approach also allows you to align your tax-saving investments to your overall financial goals. For instance, if you start in time, you can invest systematically in an ELSS, which would not only save you all the last-minute hassle but will also cater to your need of regular savings and investments with better returns.