- Understand the tax slab you fall under and the potential tax savings that you can gain from
- The lowest tax slab is 5 per cent now, which leaves additional money in every taxpayer’s hands to be utilised to the most advantage
- Rs 1.5 lakh may seem daunting for many towards tax savings, but start early on in the year and chances of last minute tax savings blues won’t exist
There is something unnerving about tax planning, which causes the smartest of people to not make it work in the most optimum way for them. People tend to address tax savings in isolation instead of aligning it with their financial goals. By doing so, they miss out on extracting the maximum from the tax savings options available to them. However, this year things will be different given the many changes in tax rules that could help you plan your taxes than cut the chase to previous quarter.
Before embarking on tax savings, understand the new tax slabs. First, the 10 per cent tax slab does not exist any longer. Henceforth, for those with income between Rs 2.5 lakh and Rs 5 lakh, the tax rate applicable will be 5 per cent. This will result in tax savings of up to Rs 12,500 per year for all tax payers. One hand takes what the other gives — the tax rebate has been reduced to Rs 2,500 from the earlier Rs 5,000 per year for taxpayers with income up to Rs 3.5 lakh. The combined effect of these changes in tax rate and rebate of taxpayers with taxable income up to Rs 3.5 lakh will now be Rs 2,575 instead of the earlier Rs 5,150.
Likewise, high value cash transaction will be nearly impossible and will have an impact on your personal taxations too. The limit for payment on expenses by cash (capital and revenue expenditure) has been reduced to Rs 10,000 per day from the earlier Rs 20,000 per day in aggregate per person. Also, there is a limit (Rs 2,000 in a year) on how much donations you can make to claim deductions under Section 80G. More importantly, it is crucial to note that a limit has been set on payments using cash for everyone, as no person will be allowed to receive Rs 2 lakh or more in cash, except from their respective bank accounts.
Saving taxes
In general, people tend to have an inclination towards fixed return instruments, especially the ones which are within the tax saving basket. The savings options, which earn a fixed return, include contributions to the mandatory Provident Fund (PF), PPF, five-year post office term deposits, five-year fixed deposits, National Savings Certificate (NSC), Sukanya Samriddhi Yojana and the Senior Citizen’s Savings Scheme.
The advantages of long-term investing cannot be emphasised more, which is where the ULIP scores. The long-term lock-in works to the advantage of the taxpayer as you get the necessary time to counter market volatility. The taxpayer has the added advantage of being in a fund where other investors are only taxpayers. Further, the exposure to equities helps the investor to earn returns, which also have the potential to beat inflation.
For someone in their 20s, time is the biggest advantage. Tax saving instruments like the ULIPs or even the NPS, which has equity exposure could be the first choice. By opting for these over other fixed return investments, the potential benefits are two pronged — you gain from the long-term equity exposure and also from the power of compounding.
Smart tax savers make every rupee they pay as tax work for them without avoiding taxes at all. What is most important is that you patiently think of what your financial needs are and how to use tax savings as an accelerator to achieve them. This will not only give you tax benefits but also the advantage of realising financial goals. So, it’s critically important to choose tax saving instruments that you understand than getting myopic, thinking of just saving tax.
A good way to make tax planning work in your favour is to check the available tax concessions (See the list below:Tax Planning 2017-18) and then identify which of these can be used favourably to go with your financial goals. In doing so, you would have ensured that you not only reduce your tax liabilities, but also stay on the path of your financial goals in an efficient manner. For instance, go for a home loan if you need a house, instead of opting for a home loan because there is tax savings in doing so. As far as possible, make the tax planning exercise a year-long affair than just get into it when you hear about them from the accounts department in your office.
Tax Planning 2017-18
Income Tax Section: Section 80C
What can you do?: Children’s tuition fee, small savings schemes like NSC, PPF and other pension plans, life insurance premiums
Maximum Investment: Rs 1.5 lakh in a financial year
. . .
Income Tax Section: Section 80CCC
What can you do?: Claim tax deductions on contributions to annuity plans from insurers
Maximum Investment: Rs 1.5 lakh in conjunction with Section 80C benefit in a financial year
. . .
Income Tax Section: Section 80D*
What can you do?: Purchase medical insurance policies for self, family and parents
Maximum Investment:
- Self and family: Rs 25,000
- Senior citizen: Rs 30,000
- Self and family + parents: Rs 50,000
- Self and family + senior citizen parents: Rs 55,000
. . .
Income Tax Section: Section 80CCD
What can you do?: Contribute to the National Pension System (NPS)
Maximum Investment:
- Employee and/or employer contribution up to 10% of basic salary and DA** is eligible up to Rs 1.5 lakh for tax deduction in conjunction with Section 80C benefits under Section 80CCD (1&2) as applicable.
- Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction outside the Section 80C limit and can be claimed as a deduction under Section 80CCE.
- Additional deduction of Rs 5,000 on expenses related to health check-up.
** Dearness allowance; by exhausting the investment options under Section 80C one can save tax up to Rs 46,350 for the financial year 2017–18, provided one falls under the highest tax bracket.
. . .
Income Tax Rates
(For Individuals, Hindu Undivided family, Association of Persons, Body of Individuals and Artificial Juridical Persons)
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Total Income
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Tax Rates
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|
Up to Rs2.5 lakh (a)(b)
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NIL
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Rs2.5 lakh to Rs 5 lakh (d)(e)
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5%
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|
Rs 5 lakh to Rs 10 lakh(d)
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20%
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> Rs 10 lakh (c)(d)
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30%
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a) In case of a resident individual of the age of 60 years or above but below 80 years, the basic exemption limit is Rs 3 lakh
b) In case of a resident individual of age 80 years or above, the basic exemption limit is Rs 5 lakh
c) Surcharge at 15% is applicable where income exceeds Rs 1 crore. Finance Act, 2017 provides for surcharge at 10% to be levied where income exceeds Rs 50 lakh but does not exceed Rs 1 crore. Marginal relief for such person is available
(d) Education cess is applicable at 3% on aggregate of tax and surcharge
(e) Finance Act, 2017 provides a rebate of lower of actual tax liability or Rs 25,000 (against earlier rebate of Rs 5000) in case of individuals having total income of less than Rs 3.5 lakh.
