Inefficient tax-planning may result in serious depletion of take-home income, especially in the last few months of the financial year, which might impact your regular financial commitments.
Tax-saving plays a vital role when you work towards achieving your financial goals. A high income tax outgo may be due to poor money management and makes it tougher for you to meet your important financial targets on time. Inefficient tax-planning may also result in serious depletion of take-home income, especially in the last few months of the financial year, which might impact your regular financial commitments. As such, you’ll be well advised to have a clear tax-saving plan at the beginning of the year and implement it consistently throughout the year to prevent any last-minute glitch or unpleasant surprise.
As we approach the end of FY2019-20, you should ideally be ready with your tax-saving strategy by now. We have discussed a few pragmatic tax-saving tips which you could find very useful.
1. Exhaust the popular tax saving options first
Before you explore relatively offbeat tax-saving measures like making donations to a political party, try to exhaust the popular options first. If you are looking for tax-saving options through investments, you can consider qualified instruments that earn deductions under Section 80C instruments up to Rs 1.5 lakh. Some of these are the Public Provident Fund, five-year fixed deposits, Equity Linked Savings Schemes, Voluntary Provident Fund, etc., or by investing in the National Pension Scheme to get tax benefit under Section 80CCD. If you want to save tax by buying insurance, you can explore traditional insurance plans or get a term policy to avail tax-deduction benefits under Section 80C and purchase a health insurance policy for self or family members and parents to get a deduction under Section 80D. You can also get tax benefit under Section 80C as well as Section 24 against your home loan (for principal and interest repayment, respectively). Similarly, don’t forget to claim tax-deduction benefit under Section 80C for payment of children’s tuition fee.
The bottom line is this: try to exhaust all the regular options first to reduce your tax liability. Also, make the most of these last few months to implement your tax-saving plans and don’t take things down to the wire to avoid making any counterproductive financial decisions.
2. Take a home loan before March 2020 to avail additional tax benefits
If you’re planning to take a home loan to fulfil your home-buying dream, you’ll be well advised to do so before March 2020. If you take a home loan to purchase an affordable home in FY 2019-20, you get a tax-deduction benefit of up to Rs 1.5 lakh under Section 80EEA for payment of interest on the loan. Do note this 80EEA deduction is for a self-occupied property only and is over and above the tax-deduction benefit of up to Rs 2 lakh available under Section 24 for loan interest repayment. Also, the 80EEA tax benefit is only available for home loans sanctioned between 1 April 2019 and 31 March 2020, and you should not own another residential property. Eligibility criteria also include conditions related to the size of the property, value of the property (stamp duty value of the property shouldn’t exceed Rs 45 lakh), among other riders. And then there’s the tax deduction benefit under Section 80C of up to Rs 1.5 lakh for home loan principal repayment during the year.
So, if you are planning to buy your first home, you can consider getting the home loan sanctioned before 31 March 2020 to avail this additional long-term tax benefit under Section 80EEA.
3. Book regular LTCG on equity investments
If your long-term capital gains (LTCG) on equity investments in a financial year exceed Rs 1 lakh, the amount over this threshold is subject to a 10% income tax. The best way to avoid this tax is by booking LTCG every year to the extent that your gains don’t exceed this taxable limit and repurchasing the shares or mutual fund units on the next day. If a major portion of your investment portfolio consists of equity instruments, you can actually make a big difference to your overall tax liability by saving this 10% LTCG tax.
4. Claim medical expenses for parents as a tax deduction
Taking a new health insurance policy for senior citizens can be a costly affair. If your senior citizen parents don’t have a health insurance policy and you are not able to get tax deductions under Section 80D to that extent, you can instead claim a tax-deduction benefit of up to Rs 50,000 against payment of medical expenses for your parents. However, you should keep all the medical bills safely as proofs to claim this tax deduction benefit.
5. Avoid long-term payment commitments to save taxes
While investing in tax-saving instruments, avoid products that require a very long-term commitment, unless they are in sync with your financial plans. For example, many of us invest in traditional insurance policies as a last-minute tax-saving measure. After a few months, we realise we don’t want to continue the policy owing to some reason, but we find it difficult to opt out at that point as exiting the policy in the initial years would cause a significant financial loss.
Hence, while in a rush to invest in tax-saving instruments, ensure you do not make rash decisions that could undermine your financial goals. This would require some research at your end to be able to choose the right instruments. If you’re unclear about your tax-saving strategy, don’t hesitate to consult your financial advisor who can help you strike the right balance between tax-saving and meeting your financial goals on time.
(The author is CEO, BankBazaar.com)