The beginning of the new financial year is a good time to reassess your finances as also to explore the possible changes that can help save tax and maximise your wealth. The increment season is about to begin. While a higher pay is always good news, it comes with the kicker of higher taxes. In some cases, the increment could take the individual into a higher tax slab. For example, if a person with an income of Rs.10 lakh gets a 20% raise, his tax slab changes from 20% to 30%.The Rs.2 lakh above the 20% slab threshold of Rs.10 lakh will attract a 10% additional tax liability. If a person earning Rs.48 lakh a year gets a 10% raise, the tax on his income will then attract a 10% surcharge.
To optimise the tax, one needs to rejig one’s income and investments so that all available tax deductions and exemptions are utilised to the maximum permissible limits. The following steps can help:
For the past two years, the leave travel assistance (LTA) could not be used very efficiently due to Covid-led restrictions on travel. But now that travel restrictions have been lifted, it makes sense to opt for this big tax saver in your CTC. Travel fare of your family is eligible for tax exemption as part of CTC. Note that the LTA should be made part of CTC at the beginning of the year. You cannot opt for it later during the year or claim it while filing ITR.
Opt for NPS contribution This benefit is offered by many companies to their employees is an unpolished diamond. Up to 10% of the basic pay put in NPS is tax free under Sec 80CCD(2). Yet, barely 10% of employees who have been offered this benefit have actually opted for it even though it can reduce the tax significantly. The NPS scores over mutual funds in terms of costs and beats other retirement saving options (such as Provident Fund, PPF and insurance plans) in terms of returns. What’s more, it allows partial withdrawals and 60% can be withdrawn tax free on maturity. The remaining 40% will be annuitised, but will be virtually tax free as the income in retirement years is much lower. This is highly recommended for employees who have sufficient liquidity. High income earners will find this particularly useful.
NPS can help save more tax if the taxpayer invests in the scheme on his own. Under Section 80CCD(1b), there is an additional deduction of Rs.50,000 for contributions to NPS. This is over and above the Rs.1.5 lakh deduction allowed under Section 80C.
Start tax saving investments There’s a saying that well begun is half done. For the same reason, don’t wait till the last few months of the financial year to make your tax saving investments. If planning to invest in an ELSS fund, start the SIP from April itself. Starting in April will allow you to diversify the risk across time instead of putting in a lump sum at the end of the year. Even if you intend to go for a risk-free fixed income option such as PPF, invest as soon as possible to gain from the power of compounding.
Submit Form 15G or 15H If your income is not beyond the basic exemption limit, submit the form 15G or 15H to avoid TDS on interest income. But make sure you are eligible to submit these forms. Incorrect declarations amount to tax evasion and can invite stiff penalties from the tax department.