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Review Tax Planning At Year End

January,February and March or JFM is considered to be a tax planning season. Most of us who have missed out in this financial year will plan for investing our money for tax saving in these last three months of financial year. But year end tax planning is an also an exercise where we commit mistakes. Not giving enough time to analyze we get lured to many benefits which cannot be claimed. But more worrisome is the frequent changes in taxation rules. Any lack of awareness can jeopardize your tax benefits if left unattended.

Tax Planning at Year End

So year-end tax planning should not be done in haste but should be a review feature in your financial planning. This will hold good on availing benefits on any aspect you would have missed out.

Here is what you should analyze while doing a review of your tax planning at this juncture:

Know The Taxation Rules

Firstly, you should be well aware of rules applicable to various investment options to avail tax benefit. If you lack awareness on any of them you can be deprived of the tax benefits you wish to claim.

Below are few of the investment rules which have been highlighted before but giving  a reminder here –

  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 benefit 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 for ELSS is three years which means you cannot withdraw any amount from your investment within this period. But most of us invest through SIP and are in a perception that the lock-in applies only from date of first installment. That’s not the case. When investing through SIP each installment, monthly or quarterly, gets locked in for three years from the respective investment date.
  3. PPF: Minor PPF account is no separate and it is clubbed with the parent 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 1.5 lakh benefit under Sec 80C, in total.
  4. NSC– The interest you earn on NSC is cumulative i.e. it is paid only at completion of the term. Due to this provision each year interest for first five years is  considered deemed to be reinvested and so qualifies for a fresh deduction under Sec 80C. Only the last year interest i.e. in the sixth year goes for taxability.

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

What’s New In 2014-2015 ?

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. Provisions listed were introduced in Budget 2014 which will either give you additional benefits or will impact your taxability when you file your income tax returns in July 2015 –

  1. Basic Exemption Enhanced–  The basic exemption limit for  income tax has been enhanced. For senior citizens it has increased from R 2.5 lakh to R 3 lakh while for others it has been enhanced from R 2 lakh to R 2.5 lakh. This will benefit many tax payers.
  2. Higher Investment Limits:  The limits for benefit under section 80C has been enhanced to R 1.5 lakh. This was a welcome decision as it has been stagnant for quite a long time. So now you can invest upto R 1.5 lakh now and avail the additional deduction from your income this financial year.  Along with this the PPF limit which was in sync with Sec 80 C benefit has also been raised to R 1.5 lakh.
  3. Housing Loan Interest – The benefit of saving by claiming exemption on home loan interest has been raised. The home loan benefit under Sec 24B has been enhanced to R 2 lakh which augurs well for your savings.
  4. Debt Taxation Increased- This was a surprise for many as the holding period of debt mutual funds for deriving capital gains has been increased to 3 years. Also, calculation of DDT has been changed from net dividend to gross dividend increasing the dividend distribution tax.

With changes being made every year, it’s difficult to make a choice. One has to give a careful thought before making any selection for investing for tax saving at year end.

How To Plan?

Young

Probability of luring to any high return product or a combo element is higher. For youngsters the tax planning is a very important element as it has many long term products which they shouldn’t miss. If you have 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 then see how much you have to actually invest. Don’t pour all your tax saving in one instrument. 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.  You will be the first person who will be contacted for RGESS for claiming benefit over and above Sec 80C. 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.

Middle Age

Your Sec 80C will be well covered by EPF, Children tution fees and other avenues which you would have already availed. Mostly at this age 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. Avoid getting into 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.

Retired

The needs 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. But considering you will be locking the money for five years an ELSS can also be considered for this horizon. The rest 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 change the option to avoid higher taxability due to change in rules. But involve a Financial Planner before making the decision.

Whichever stage you are the need of effective tax planning is necessary. Year end tax planning  gives you very less time to plan. Ensure you do it only for  a review  and aim to sit in April to plan your taxation for the year.  At times, paying little tax then investing beyond your means is also a wise strategy to adopt.

Have you invested in any new provisions What was your thought process?

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