BQPortfolio: Here’s How You Can Still Save Tax This Year

The financial year is drawing to a close and with it the window for making tax-saving investments. For many individuals who have been less than conscientious in planning their investments, a few minutes of effort over the next couple of weeks can dramatically curtail tax spending.

Limited availability of cash can prove to be the only major hindrance to saving tax at the end of the year,” according to Arvind Rao, founder of Arvind Rao & Associates. “But, if this barrier can be surmounted, saving tax can be quite easy and well worth it,” the chartered accountant and a certified financial planner told BloombergQuint.

The first thing to do is to identify if you have made any investment declarations at the start of the year. You will probably vaguely recall an e-mail from your HR executive advising you to submit them before the deadline. If you did not, your employer will have assumed that you did not intend to make those investments and would have deducted tax at source accordingly.

If you did make those declarations—and this is critical—identify the amount of investments you have declared, because having missed the deadline for submitting the proofs, the tax deducted at the end of March will be significant.

So, either way, the tax has already been deducted at source. By making some of the investments listed below, you can apply for a refund when you file your returns for the financial year ending March 2019.

When deciding which tax-saving investments to make, it is a good idea to familiarise yourself with the broad deductions that are provided under the Income Tax Act. One major change introduced in Budget 2018 was the standard deduction of Rs 40,000 in lieu of exemptions allowed separately for transport and medical expenses. Put together, these exemptions amounted to Rs 34,200 in the previous year.

What this means is that before the deductions arising out of tax-saving investments are applied, a standard deduction of Rs 40,000 is applied to your gross income.

Section 80C

Most salaried individuals make use of Section 80C of the Income Tax Act to make basic tax-saving investments. The total deduction to taxable income available under this section is Rs 1.5 lakh. The first thing you have to do is check your contribution to the employees’ provident fund. That, like some other deductions from your taxable income, happens automatically by your employer.

Other Avenues

Another Rs 50,000 can be saved by investing in the National Pension Scheme under Section 80CCD of the Income Tax Act. Under Section 80D, you can take a health insurance cover for yourself and a premium of up to Rs 25,000 is deductible from your taxable income.

Additionally, if you have senior citizens at home, you can buy health insurance policies for them and avail of a further deduction of up to Rs 50,000 for premium paid.

If your salary does not include a provision for house rent allowance, Section 80GG allows you to reduce up to Rs 60,000 from your taxable income.

Education loans are sometimes a drag, but Section 80E of the Income Tax Act lets you deduct the entire interest paid during a year from your taxable income for your own higher education, or that of your spouse or children.

To encourage home ownership, the government provides benefits to new home buyers under Section 24 of the Income Tax Act. Interest payments on housing loans to the extent of Rs 2 lakh can be reduced from taxable income. And the best part is that your spouse is also eligible for a similar deduction, so the total benefit afforded is Rs 4 lakh towards payment of the interest portion of your housing loan EMI.

Finally, the interest you earn from your savings bank account up to Rs 10,000 is also deductible from your taxable income. For senior citizens, interest income up to Rs 50,000 is deductible.

Stay Ahead Of The Curve

The interim budget 2019 caused some confusion over the tax rules that will apply to salaried individuals in the financial year that starts April 1. A common misconception is that Finance Minister Piyush Goyal announced a change in the tax slabs.

This isn’t the case. Instead, the finance minister proposed to give a tax rebate to individuals whose taxable income was below Rs 5 lakh. What that means is a salaried individual, having claimed as many deductions as possible, having a taxable income of more than Rs 5 lakh will not receive a rebate, and will therefore pay tax of Rs 12,500 on income between Rs 2.5 lakh and Rs 5 lakh. And, on the income above Rs 5 lakh, the individual would have to pay tax based on the prevailing slabs, which is 20 percent between Rs 5 lakh and Rs 10 lakh, and 30 percent on income above Rs 10 lakh.

The only other major change an individual has to account for is the increase in standard deduction to Rs 50,000. All other deductions remain the same.

On this episode of BQPortfolio, Kartik Jhaveri, director at Transcend Consulting, along with Rao, said while it is technically possible to save tax by making large tax-saving investments, an investor should take a decision based on whether these investments would come at the cost of other long-, medium-, and short-term goals.

Tax-saving investments, like fixed deposits, equity-linked savings schemes, and the national pension scheme, are necessarily long-term investments. As a result, concentrating investments into these options would affect availability of funds for investments towards short-term goals.

Watch the full episode here: