In the new financial year, lockdowns in several states have once again forced people to look out for ways to increase the monthly flow of in-hand cash. Proper tax planning can help in that direction.
Income Tax planning: Covid-19 pandemic has hit the salaried class hard. Lockdown led to salary cuts and even job losses for lakhs of employees last year. Even the informal sector workers have been badly hit by the pandemic and subsequent lockdowns. We have always believed in the importance of having more money in hand to face any crisis. However, the pandemic has helped reinforce this idea, probably like never before for the new generation. Even experts believe that salaried individuals should learn from the pandemic and start investing to create a contingency fund.
Contingency investment should be done in liquid funds so that it can be redeemed immediately when the need arises. The ideal amount of contingency fund should be six times of your monthly salary/income. In the new financial year, lockdowns in several states have once again forced people to look out for ways to increase the monthly flow of in-hand cash. Proper tax planning can help in that direction.
Archit Gupta, Founder and CEO, ClearTax, suggests that individuals should manage their income and investments to save on taxes. This will leave them with more money in-hand
“The new financial year is underway, and you must manage your income and investments to save on taxes. Employers deduct applicable taxes in advance from the salary paid to their employees. You must evaluate your total expected income for the financial year and invest in suitable tax-saving investments if you expect your income to exceed the taxable limit,” Gupta told FE Online.
Gupta further said that you must choose investments that qualify for the Section 80C tax deduction up to Rs 1.5 lakh per annum, depending on your investment objectives and risk tolerance. For example, he said that a conservative investor may invest in PPF or NSC, while an aggressive investor may opt for ELSS, which invests mainly in stocks.
“Salaried employees living in rented accommodation can claim house rent allowance or HRA. You get a tax deduction up to a prescribed amount based on certain conditions. You can save taxes on health insurance premiums under Section 80D, and you qualify for a tax deduction on home loan interest up to Rs 2 lakh per annum,” Gupta said.
Salaried individuals must submit tax-saving proof to their HR on time so that TDS is not deducted from their salary unnecessarily. The accounts department computes the taxes only after receiving documentary tax-saving proof.
“Ensuring you have done requisite tax planning and informed your employer will ensure that TDS deducted on your salary is as per your tax-saving goals, this will leave more cash in your hand,” said Gupta.
Sujit Bangar, Founder Taxbuddy.com, said the best lesson to be learnt from the year 2020 is about disciplined investments. Lack of financial discipline caused helplessness in 2020. “When future is uncertain, only your good past deeds of savings and investments would rescue you.”
It is said that in crisis ‘cash is the king’. Therefore, Bangar said. the major objective of tax planning in these times should be to ensure more in hand salary so it would be possible to conserve cash.
Usually, we start thinking about tax planning at the end of the financial year. For example, in the month of February. At that time we have only two months’ income in our hand for the use of tax-saving investments. Also, many year-end expenses are also piling up at that time. As a result, we end up doing less optimised tax planning.
Therefore, to increase refund, you should plan your taxes to maximise tax saving with minimum cash outgo.
Bangar suggested that one should follow two principles in this period of lockdown:
- Plan your taxes in May/June and utilise runway of 11–12 months for tax saving investments to have less pinch on cash flow.
- Work out how much tax has already been saved by unknowingly done things like tuition fees for kids etc.
“Planning taxes means certain cash outgo for the purpose of investing. Due to the COVID crisis, our cash requirements have increased and we may need more cash at disposal. From the current year, the taxpayer has the option of a new tax regime where without any tax-saving investments, the user can enjoy the benefits of lower tax rates. Lastly, covid times have shown us the importance of having health insurance for self and family. Income tax act provides tax deduction u/s 80D for health insurance premiums paid for self and family members. Therefore, go for health insurance ASAP if not availed so far,” Bangar told FE Online.