How to do Year End Tax Planning?

Tax Planning is what Rajiv has always considered doing it in the last two months. Every year whenever he has to submit proof to his employer, he will search for the tax saving instrument. As a result most of his financial outgo is heavily burdened in these two months. But this year managing his outgo is very  difficult for him as he has to foot bills for his mother health emergency.

Year End tax planning is an exercise where most of us makes mistakes. But there is more to it now since many rules have been changed and every year new instruments are being rolled out for tax saving. With so much to bother about, it is always a good idea to make year-end tax planning review a regular feature of your financial planning.

Here is what you should do while  reviewing  your tax planning in these months:

Knowing The Rules

Firstly, you should be well aware of rules applicable to avail tax benefit through investments under various sections. Unawareness on any of these rules can deprive you the tax benefit already claimed.

Below are few of them to take note of –

1. Insurance: The SA of your life insurance policy now has to be minimum 10 times of your premium amount else you not only loose sec 80C but also sec 10(10D) benefit. Similarly If you pay premium of your health insurance by cash then you cannot avail Sec 80D benefit.
2. ELSS– The lock in three years and when invest through SIP, each installment is locked in for three years.
3. PPF: Minor account is no separate and it is clubbed with the parents earning higher income. So if you have an account of your own and a PPF account of your child, you will be able to claim Rs 1 lakh benefit under Sec 80C, in total. Also, contribution to your spouse PPF account does not entitle you for any tax benefit claim.

Like this there will be rules applicable for every investment which you should analyze well before making a  choice

What’s New This Year  ?

There are many provisions which have been introduced in last two year budgets. Some of them are related to additional tax savings while some impact your taxability from investment earnings.Below listed were introduced in 2013 budget which will either give you additional benefits or will impact your taxability when you file your returns in July –

1. Tax Credit: For individuals up to 60 years of age and  income upto Rs 5 lakh a tax credit of Rs 2000 will be there for this financial year only.

2. Additional Deduction for Disabled: For disabled individuals falling under sec 80U and 80DDB, the rule of life insurance where SA has to at least 10 times of the premium, has been relaxed to 15 times.

3. RGESS: The scheme was launched in 2012 for new investors in equity markets. In 2013 the eligibility limit of income to invest in this scheme was raised from Rs 10 lakh to Rs 12 lakh.

4. Extra Home Loan Deduction: Anyone buying his first house and availing  a loan this year will be able to get an additional deduction of R 1 lakh  provided the loan value is upto Rs 25 lakh and the value of house is Rs 40 lakh or below.

Apart from these there are other provisions like reduction in STT or Increase in DDT which is going to affect your taxability, if you have transacted in mutual funds. Another major provision for this financial year was a 1% TDS on property with value of more than Rs 50 lakh,which means higher liability for payment of tax if you are selling yours in this financial year.

With such new provisions and already more than required provisions bundled in Sec 80C, it’s difficult to make a choice. One has to give a careful thought before making any selection during year end.

Young

Probability of luring to any high return product or a combo element is higher when we are young. For you the tax planning is a very important element at it has many long term products which you shouldn’t miss. But If you has landed into tax planning for these two months then you need to select instruments very wisely. Check out your contribution to employer benefits such as EPF and others to see how much you have to actually invest. Don’t pour all your tax saving in one avenue. ELSS is a good option if you aim for generating better returns in long term but diversify among this category also. Apart from this Fixed deposit can be a good choice in last minute decision if taxability of interest is not an issue. But do remember that it is taxed on accrual and so may be taxed tomorrow when your income reaches those limits. You will be the first person who will be contacted for RGESS for claiming benefit over and above Sec 80C and with different names. Understand the structure and ensure about your long term investing there. Buy a health insurance if you do not have so. This will give you benefit under Sec 80D and at young age you don’t have to go for a medical test. But remember to fill up the information yourself. Its wiser to avoid long term products while investing new at this moment as they need a good analysis of your requirement.

Middle Age

Your Sec 80C will be well covered by EPF, children’s tution fee and other avenues which you would have already availed. Generally, at this lifestage, the requirement for Sec 80C is very less. If any, then ELSS is  a good choice for lumpsum investment. Avoid luring to bundled products and aim to contribute where you are already doing. If housing loan liability is there good enough tax saving would have been done through this. Don’t invest in any new tax saving instrument without understanding the structure. If you have a surplus you can also look at availing Sec 80G benefit by donating the money. It serves you the social cause and also help you in claiming the tax benefit. Review your investment to see whether you are impacted by change in taxation rules.

Retired

The needs post retirement are different and so the selection of right instrument is necessary. Firstly avoid getting yourself lured to any long term products. Many retiree’s fall into the insurance agent trap and commit mistakes of investing their entire money in it. Don’t  aim for higher returns and settle for an instrument where you earn less but avail the tax benefit too. Sec 80C will be well served by FD if you are in a lower tax slab. If your risk appetite is high,  you cam also consider ELSS  for such horizon. Majority of the products are long term and may not meet your requirement. Health insurance is there with you to claim 80D benefit. If you have been sitting on dividend option of debt mutual funds good to review to factor in  higher taxability which would have reduce your income. Involve a Financial Planner before making the decision.

Whichever stage you are, there us a need of effective tax planning. Only Year end tax planning is dangerous since it gives you very less time to analyze. Ensure you make it a review process and do your tax planning in April. At times, paying a little tax then investing beyond your means is also a wise strategy to adopt.

Are you planning for your taxes now?

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