Strike the right balance in your tax outgo with proper tax planning
May, 02nd 2011
With 31 March gone, tax planning is no longer on the priority list of taxpayers. The focus is on filing tax returns. Many taxpayers will have tax refunds because they were either not able to submit relevant documents to their employer or bank in time or did not compute their tax liability correctly. Others may discover that they have unpaid taxes because they did not take their income from other sources into account. In both cases, taxpayers stand to lose money.
Paying more tax than due is like giving the government an interest free loan. The excess tax is deducted from your salary or interest income. But you get it back only after you file your tax returns. Till then, your money lies in the government coffers without earning a paisa in interest.
After a taxpayer files his returns, the refund that is due starts earning interest. But this is a piffling 6% per annum, which is far below the 9-10% offered on bank fixed deposits and insignificant when compared to the potential returns from other asset classes such as gold and equities.
The worst hit are low income earners and senior citizens who fail to submit their Form 15H or Form 15G to banks for exemption from tax deduction at source (TDS) on interest income. If these declarations are not submitted, the bank will pay interest income only after TDS. The TDS rate on interest income is 10% if the income exceeds `10,000 in a year. However, if the individual has not submitted his PAN details, the TDS rate is 20%. Once the TDS is deducted, it can only come back after the taxpayer files his returns.
The tax department has now made arrangements for refunds to be made within 30 days of filing returns. But in some cases the refund can take several months, even years to reach the taxpayer. Imagine the opportunity cost of your money earning nothing for months and then getting 6% interest when it could have grown by 10-15% if you had invested it right. What's more, some taxpayers have to grease the tax department machinery with up to 10% of the refund amount to get it moving.
You also stand to lose money if you have not paid all your tax by the due date. It is common for taxpayers to miscalculate their tax liability for the year. If you have changed jobs during the year, you might have got a deduction from both employers. The second employer will not take into account the income from the previous job unless you provide that information. As a result, your tax will be calculated on the basis of the income for the rest of the year and a basic exemption that the previous employer would have also factored in.
Often, this leads to a taxpayer paying lower tax than is due. If this tax is not paid by 31 March, there is a 1% late payment penalty for every month of delay. That's 12% per year, which is very steep. If you discover four months later at the time of filing tax returns that you have underpaid Rs 20,000 in tax, you will have to shell out Rs 800 as penalty.
Capital gains are another mine field for the careless taxpayer. Individuals who make capital gains are supposed to pay tax on a quarterly basis. For instance, the tax on the capital gains earned from sale of stocks or mutual funds in the April-June quarter has to be paid by 15 September. The tax on profits made in the July-September quarter has to be paid by 15 December. If you don't pay the tax by the due date, it could attract a late payment penalty.
You can avoid these problems by paying just the correct amount. And the best way to ensure this is by making tax planning an integral part of your investment planning. Instead of compressing tax saving investments into the last few weeks of the financial year , start from the very first month of the new financial year. Inform your employer about tax saving investments you plan to make and give documentary evidence as soon as possible.
If excess tax has been deducted, you can ensure faster refunds by e-filing your tax return. Be sure to mention you bank account details in your tax form. If the bank code and account number is correct, the refund should reach you within a few weeks of filing returns.