NEW DELHI: As we enter the new financial year 2022-23, it is time to relook at your tax planning for the year ahead. The reasons why you should review your tax plans every financial year could be many -- changes in tax laws announced every year in the budget, change in your income/expenses or even in some cases change in salary structure.
Before we go into changes in tax laws, income/expenses or salary structure, let us first discuss some of the basic tax planning strategies: Look at the bigger picture: Your tax planning should not be done in isolation. It should be part of your larger financial planning goals. Your tax-saving investments should be in sync with the larger financial portfolio. If your financial portfolio is loaded with debt investments - fixed deposits, Public Provident Funds, debt funds, bonds, etc - then while choosing tax saving instruments, you could opt for equity linked tax saving mutual funds, Unit linked insurance plans (Ulips), etc.
Staggered investments: Invest small amounts every month rather than investing in lump sum once every year. Do opt for regular investment plans - monthly or quarterly - instead of half-yearly or annual investments. If you want to invest Rs 1.2 lakh every year in a tax saving instrument, do it through monthly SIPs of Rs 10,000 rather than Rs 60,000 once in six months or Rs 1.2 lakh at one go. This helps in planning your monthly budget better.
Buy insurance for coverage not tax planning: Life and health insurance coverage is a must in any financial portfolio. Their primary role is to provide financial support against any untoward events in your life - death, accident or medical emergencies. The amount of premium you pay every year on insurance products, therefore, should be based on the need of the insurance coverage and not the shortfall in Section 80 C or Section 80 D targets.
Claim the expenses: There are many routine expenses such as expenses on education, healthcare, home loan principal repayment and interest payments on home or education loans, etc which qualify for deductions under different provisions of the Income Tax Act. A substantial chunk of your annual earnings can be saved by claiming these expenses as tax-deductible.
Change in salary structure
Usually, your annual hikes or salary revisions come into force from 1 April of every year (even in case of late appraisals, the change comes into effect retrospectively from 1 April). You should be able to understand the tax repercussions of these changes. If a salary hike results in you getting into a higher tax bracket, you must calculate how much extra tax you have to pay, and if there are expenses or investment options that you can use to minimise the tax effect. For example, if you have already exhausted Rs 1.5 lakh annual tax investment options, one can still get an additional deduction of Rs 50,000 under NPS.
“Investments made in NPS (Tier 1) do qualify for deduction under Section 80CCD(1) and Section 80CCD(1B). Deduction under Section 80CCD(1) is in aggregate with section 80C. However, you can claim an additional deduction of Rs 50,000 under 80CCD(1B) by investing in NPS Tier 1,” says Sandeep Sehgal, Partner-Tax, AKM Global, a tax and consulting firm.
You may have to assess the tax implications of salary changes. For example, some organisations hire you as consultants, and pay you a fee for services rendered. Typically, this system allows you to lessen the tax liability by allowing you to deduct several expenses from your taxable income.
A consultant can claim expenses like telephone and internet cost, fuel cost, vehicle insurance cost, salary paid to driver, and even cost newspaper and periodicals.
Changes in tax laws
Interest earned on excess contributions made in Employee Provident Fund (EPF) over Rs 2.5 lakh a year for non-government employees and over Rs 5 lakh for government employees would be taxed from 1 April 2022. One can limit one’s EPF contribution to Rs 2.5 lakh a year and invest in some other options. “The individual taxpayer can now make a conscious decision to invest in such other options like mutual funds or shares which are chargeable to tax at less rate of tax as compared to interest income,” says Saurrav Sood, practice leader (International tax), SW India, a tax advisory firm.