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Last Minute Tax Planning: What You Should Do?

IndianMoney.com Research Team | Posted On Wednesday, March 13,2019, 11:37 AM

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Last Minute Tax Planning: What You Should Do?

 

 

It’s tax season. Time to file your income tax returns or ITR. The financial year ends on 31st March. You have to file ITR for the Financial Year 2018-19 by July 31st 2019. Financial Year is the year in which you earn the income. Assessment Year is the year in which you pay tax on the income earned in the Financial Year.

Last Minute Tax Planning: What you should do? In the rush to save taxes, you commit mistakes. You have to do tax planning, make the necessary investments, avail insurance and so on. Tax planning should be done, ideally at the start of the financial year. But, it’s never too late for tax planning.

What is tax planning? The Income Tax Act gives certain tax exemptions and tax deductions for salaried, professionals, businessmen to save tax. Tax Planning is the analysis of your financial situation from the tax efficiency point of view. You make use of tax exemptions and tax deductions to minimize tax liability over a financial year in the legal way.

Want to know more on Tax Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

Last Minute Tax Planning: What You Should Do?

When it comes to taxes, a rupee saved is a rupee earned. Remember to link PAN with Aadhaar which is compulsory to file ITR. Before saving taxes, calculate how much you want to save.

STEP 1: Add up all your tax-saving investments:

Your investments in PPF, EPF (own contribution), ELSS, 5 year tax saver FD, Sukanya Samriddhi Scheme, NSC, POTD and NPS enjoy tax benefits up to Rs 1.5 Lakhs a year under Section 80C. You can avail life insurance plans like term insurance plans, endowment plans, ULIPs to save tax under Section 80C.

Remember: Section 80C is a collective deduction on all qualified expenses and investments up to Rs 1.5 Lakhs a year.

Tax Saving Investments

Amount (Rs)

EPF

24,000

PPF

15,000

NSC

5,000

ENDOWMENT LIFE INSURANCE PLAN

20,000

ELSS

15,000

5 YEAR TAX SAVER FD

10,000

NPS

20,000

TOTAL

109,000

(b) The EMI on your home loan is divided into two parts. EMI on home loan = EMI (Principal) + EMI (Interest).

You get a tax deduction on EMI (Principal) on home loan under Section 80C up to Rs 1.5 Lakhs a year. You also get a deduction on tuition fees paid for your children. (This is up to 2 children). The deduction is only for the tuition fees portion of the total fees paid.

Add these expenses:

Expenses

Amount (Rs)

EMI HOME LOAN (PRINCIPAL)

20,000

TUITION FEES OF CHILDREN

10,000

TOTAL

30,000

How Much Should you Save?

You get a maximum tax deduction up to Rs 1.5 Lakhs a year under Section 80C of Income Tax Act.

You have used Rs 1,39,000 under Section 80C and have a balance of Rs 11,000 to invest.

STEP II: Choose an investment

Risk Profile:

This is a measure of risk you are willing to bear in investment. An aggressive investor is willing to bear a higher risk for higher return. A conservative investor is willing to settle for lesser returns at lower risk.

Aggressive Investor:

He is willing to take high risk. He would invest in NPS, ELSS and ULIPs. Returns from ELSS could be 12-14% over the long-term.

Conservative Investor:

He wants low risk in the investment. He would invest in 5 year FD, NSC and PPF. He would settle for returns of 7-10%.

Let’s take a look at returns of some of the investments:

Traditional Life Insurances:

Endowment Plans give returns in the range of 5-6% a year.

NSC, 5 year tax saver FD, PPF gives returns in the range of 7-8.5% a year.

Aggressive investments like ELSS or equity ULIPs give more than 12% returns a year.

Taxability of investments:

Income is tax free: PPF and EPF enjoy EEE tax benefits. The amount invested enjoys tax deductions under Section 80C up to Rs 1.5 Lakhs a year. The interest earned and the amount withdrawn at maturity are tax-free. (This is EEE tax regime).

Partially Taxable: ELSS, NPS are partially taxable. Long Term Capital Gains from ELSS above Rs 1 Lakh are taxed at 10%. In case of NPS (National Pension System), 60% of maturity corpus is withdrawn as a lump sum at maturity. This is at the age of 60 years. The remaining corpus (40%) is compulsorily annuitized.

Fully Taxable: The interest on 5 year FD, interest on NSC and interest on SCSS is taxed.

Liquidity:

ELSS has a 3 year lock-in and you cannot touch this investment for the period. 5 Year Tax Saver FD has a lock-in of 5 years and PPF has a lock-in of 15 years. NSC and SCSS have a maturity period of 5 years. You need to stay invested in NPS and pension plans till retirement.

Understand the liquidity of tax saving investments. ELSS has the shortest lock-in of 3 years. PPF forces you to stay invested for 15 years.

Tips for Investors to Save Tax:

  • Invest in ELSS via SIPs or Systematic Investment Plans. Systematic Investment Plans popularly called SIPs allows you to invest small sums of money regularly, say once each day, month or fortnight in a mutual fund. 
  • If you are not comfortable with ELSS, invest in NPS or 5 Year Bank FD. Do remember that interest earned is taxable.
  • Understand the lock-in period of the tax saving investment.
  • Never wait for the last minute for tax planning.

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