The best time to plan your taxes is the beginning of the financial year. The new FY 2018-19 has just begun, and soon your employer will ask you to submit Form 12BB to provide information on the tax-saving expenses and investments you are going to make throughout the year. If you carefully plan your investments, you can make optimum utilisation of all tax-saving opportunities available to you. However, when you plan your investments this time, keep the following important things in mind.
1) Analyse existing financial commitments
All of us have some regular ongoing expenses which can help us save taxes. For example, tuition fees paid for our kids, rent paid for the house we live in, education loan or home loan repayment. These are some unavoidable expenses which also reduce our tax liability. If you are already making regular investments in some tax-saving investment plans like PPF or tax-saving mutual funds, then you take these into account as well. You should let your employer know about all such expenses and investments and do an analysis to find out how much more you need to invest in doing optimum tax saving.
2) Analyse tax-saving investments
Once you have figured out how much more you need to invest to save your taxes further, you should evaluate all your options carefully on the basis of risk, return and liquidity.
3) Maintain documents
Remember that for every tax-saving expense or investment that you promise to make, your employer will need proofs. So, make sure that you keep all the relevant documents like bills, receipts etc. safely for submission at the end of the FY.
4) Track your progress
If you want to follow your financial plan effectively, you need to monitor your progress continuously. Set up multiple milestones and accordingly make regular investments so that you do not fall behind your target.
5) Use your PPF Saving more effectively
Investment in PPF is a very effective way of saving taxes while getting a good return on investment. However, if you have a PPF account which is at least seven years old, you can make a partial withdrawal and reinvest it in your PPF account or some other tax-saving investment plan. In this way, you can overcome the current fund crunch if any.
6) Claiming HRA
In many cases, rent receipts and rental agreement copy are enough to claim HRA tax exemption. However, if your annual rent payment is going to exceed Rs 1 lakh, you will also need to submit a copy of your landlord’s PAN card to claim the benefit.
7) Claiming LTA
A new LTA block period has begun from January 2018. It is a less-known fact that any unclaimed domestic travel expense of the previous block can be claimed in the first year (i.e. 2018) of this block. One can claim two journeys as LTA in a block of 4 years, but if one or more remained unclaimed in the previous block, it could be claimed this year.
8) Claiming medical expenses of senior family members
If you have senior citizens in your family like your parents or grandparents who do not have an insurance cover, you can claim a tax deduction for the medical expenses you incur for them. Earlier, this deduction was available only in case of super senior citizens, but now its also available for senior citizens.
9) Planning to change job
If you change your job in the middle of the ongoing FY, remember to submit form 12B to your new employer so that he knows about your previous income and TDS and calculates your tax liability correctly and make payments.
10) Compare the cost of your existing loans against post tax returns on your investment
Don’t invest just to save taxes. If you have any existing high-cost loan, then first pay it off as it will be financially apter. E.g., if you have taken any personal loan where you are paying 15% interest, it makes more sense paying it off early than investing in PPF as it will earn you only 7.6% interest.
(By Chetan Chandak, Head of Tax Research, H&R Block India)