All about tax-saving planning

Even as Covid-19 crisis has derailed established norms of living and substituting them with new set of rules, there are certain areas in the financial system which have remained unscathed so far. And one such norm pertains to the income tax. As there are still four month (December 2020 to March 2021) at your disposal, it the most appropriate time for those who fall under income tax net to consider and review an efficient tax-saving plan.

In other words, it’s the onset of tax season which actually means some maddening moments for those who fall in the income tax bracket. However, they need to gear up to make these maddening moments a very sane one. This means, people should look for appropriate tax saving avenues right now.

   

It’s worth mentioning that there are certain things in which government wants its citizens to invest for their own good and for the welfare of the nation. So to encourage people to invest their money in the “these certain things” the government grants income tax exemption. However, the key is to understand how tax-saving investments could fit into ones finances and adopt approaches that will help to choose the right tax-saving investments. So the basic thing in axing the tax is choosing the right kind of tax saving investment option. If one invests part of his income into government bonds, infrastructure bonds, life insurance, bank fixed deposits etc. then ones income will reduce. This means he has to pay less income tax.

The investment in these tax saving things does not just go away. One is actually creating an asset that produces money. So, instead of losing the earning power of the money by paying income tax, one could use the money to create an asset and also save tax.

Pertinently, efficient tax-saving planning is entirely dependent on quality financial planning. This financial planning is all about managing money. And the best tool to manage your money to bring financial convenience to you is to prepare a budget.

Needless to mention, budgeting lies at the foundation of every financial plan. It’s about understanding how much money you have, where it goes, and then simultaneously planning how to best allocate those funds to realize different goals. Creating a budget always looks just a tedious financial exercise, that too when you feel your finances are already in proper order. But you might be surprised at just how valuable a budget can be. A budget helps you to keep your spending on track. Don’t be surprised to see some hidden cash flow problems uncovered that might free up even more money to put toward your other financial goals.

Meanwhile, negotiating tax matters at this juncture is the time when most of us rush for investing in tax saving instruments. We have a bad habit of deferring our tax saving investments till the last quarter of the financial year. This way, most of the time, we end up investing casually without aligning tax saving investments to our benefit. We invest in instruments which might not help us create wealth in the long-term.

What is the best time for tax saving planning?

Three basic things need to be taken into account while planning tax saving. Firstly, check the tax-saving expenses that you are already making that you can claim. This includes expenses like insurance premium, children’s tuition fees, etc.

Secondly, deduct this amount from threshold limit to work out how much you need to invest. The entire amount doesn’t need to be invested if expenses are covering it. Lastly, choose tax-saving investment scheme matching your financial goals.

Here, let me  reproduce ClearTax report, which says the best time to start planning tax-saving investments would be the beginning of a financial year.  The reports suggests: “Instead, if you plan at the start of the year, you can make investments that can also help you fulfill your long-term goals. Tax-saving investments should be used to build wealth as well, not only to just save tax.”

What is a tax bracket? 

First let’s understand that rich people can afford to give more money towards the development of the country and poor people cannot give much. There is another category of people who are really poor people and cannot give anything at all since they are themselves struggling financially. So, the people are categorized on the basis of how much income they make. They may be “very poor” or “poor” or “rich” or “very rich”. If one falls in the “very rich” category then one has to pay a higher percentage of his income towards the development of his county. “Very poor” category does not have to pay anything. So, this is basically what tax brackets are. The percentage of one’s income, which one has to pay, is “income tax” and this percentage depends on how much one makes or which “tax bracket” one falls in. 

However, there are legal ways of paying less tax than what one is supposed to pay. And this way is through “investments”. If one invests part of his income into government bonds, infrastructure bonds, life insurance, bank fixed deposits etc. then ones income will reduce. This means he has to pay less income tax. 

Which expenses are considered for tax-saving?

Expenses like insurance premiums, children’s tuition fees, EPF contribution, home loan repayment etc let you avail tax benefit under Sec 80C. The expense incurred on health insurance premium paid for yourself, spouse, children, and dependent parents under section 80D allows one to go beyond Sec 80C to increase tax saving. Though Section 80C does offer a major tax-saving deduction, there are other sections that one can explore like 80D, 80E, 80EE, 80DD, 80G, 80GG etc. One should seek consultation from tax consultants before investing in any tax-saving instrument.

What are the options in tax-saving instruments?

Even as there are many options, they can be categorised broadly into two categories; market-linked investment option like ELSS, NPS and fixed income tax saving avenues, the popular being Public Provident Fund (PPF), Voluntary Provident Fund VPF, SCSS – Senior Citizens’ Savings Scheme, Post Office Time Deposit Account (POTD), National Savings Certificates (NSC), Sukanya Samriddhi Yojana (SSY), Tax saving Fixed Deposit.

Look at your risk bearing capacity and then make choices between the two set of categories. When we talk of risk-bearing capacity, it’s your ability to handle volatility, liquidity requirements and minimum locking required by you. Here, let me reproduce what a tax-consultant advises: One must look at the tax treatment of the investment option and post-tax returns, to evaluate the investment avenue under consideration.

For instance, the interest income earned from a tax-saving fixed deposit is taxed at the individual’s applicable tax slab, whereas capital gains from ELSS get the same treatment as equity instruments. Short term capital gains (STCG) attract a tax of 15%, while Long term capital gains (LTCG) are only taxable if the gains exceed Rs 1 lakh during the financial year. Thus, for an individual with a 30% tax bracket; a tax saver fixed deposit (FD) with five-year lock-in having 6% interest rate will give post-tax returns of 4.2% approx. which is good to preserve capital. However, post adjusting for inflation, will not lead to wealth creation over the long term.

Is J&K Bank having a tax saving bank fixed deposit?

J&K Bank is offering Tax Saver Term Deposit Scheme (TSTDS) granting income tax exemption to the depositors under section 80C of the income tax act 1961.

You can deposit minimum Rs1000 and maximum up to Rs. 1.50 lakh under the scheme. The money deposited will remain locked for minimum five years. This means you cannot withdraw money deposited under the scheme for 5 years and can’t even raise a loan against the said deposit. However, you can keep your money for 10 years period. Notably, income tax rebate will be available only for the first year of the scheme. For every year you have to invest afresh in the scheme to seek the tax exemption. It has three options where you can get interest on monthly, quarterly basis or at the time of maturity. 

(Inputs from a tax-consultant friend are acknowledged)

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