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Start planning to save tax in the new fiscal year
April, 01st 2016

If I ask you about the first day of the year, chances are, January 1 or perhaps the day after Diwali come to mind. But I refer to a different kind of new year, one defined by the world of taxes. It begins on April 1 and runs through March 31 of 2017.

Your income tax return isn’t due to be filed until July 31, but around this time every year, many people begin to look for investment avenues to help reduce their tax liability.

You are probably too late. Past March 31, you have essentially missed an entire year of investing in tax-savings opportunities that could have been applied to your 2015-16 taxes.

But don’t be disheartened. The good news is that there is no time like the end of one financial year to get a jumpstart on planning for the next one.

So in the next few weeks, think about investing in tax-saving schemes for the next financial year, 2016-17. More importantly, start investing in them right from the get go: from April.

Confused about exactly what schemes to invest in? Well, there are a variety of options out there, but life insurance and pension plans might be a good place to start as premiums paid towards these will reduce your taxable income for the next year.

Here’s how this works.

In order to encourage people to save, the government allows for a variety of investments that are tax-exempt. These investments are categorised under Section 80C of the Income Tax Act. If you are an individual tax payer (or a Hindu Undivided Family for that matter), you are allowed a certain amount of deductions for investments, expenses and payments, from your gross total income under this section of the IT Act.

Then, there are tax savings you can make under Section 80CCC. This section of the Income Tax act allows for deductions from investments in pension funds. It’s key to remember that the investment limit of Section 80CCC is clubbed with that of Section 80C. This means that the total amount you can deduct for both sections together is Rs 1,50,000.

To maximise your tax benefits, it’s a good idea to invest in a range of schemes categorised under these two different sections.

Then to figure out your total savings, add up your premiums for all your investments under the two sections: this total amount is what you will deduct from your taxable income (remember, your maximum deductible premium amount is Rs 1,50,000).

To put this in context, let’s assume that you fall into the highest tax-paying bracket because you earn more than Rs 10 lakh a year. Your tax benefit, calculated at the highest tax slab rate of 30.9% on the maximum premium of Rs 1,50,000, will amount to Rs 46,350.

What’s more, when it comes to life insurance plans, in addition to the tax savings you can incur, you can also get tax benefits on the maturity amount.

The trick is to start planning your investments early on and to spread them out across the various instruments specified under these two sections of the Income Tax Act so you can avail of maximum tax benefit.

So out with the old, and in with the new, make a tax-savings resolution in the new financial year.

The writer is a financial journalist and author of Money Smart: The Indian Woman’s Guide to Managing Wealth

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