Investors Should be Cautious with Tax Planning for FY2021-22

Consequently, you need to be more strategic towards saving your taxes as well, many individuals keep their tax planning exercise pending for the year until the last moment and end up paying large sum due to lack of tax-saving strategy.

You see, payment of taxes eats up a significant portion of your savings and this scenario will occur if you are not fully aware of the benefits that can be obtained by tax planning. Tax planning is a legal process that involves several steps which reduces your liabilities and tax payments by implementing the appropriate deductions available under various sections (80C, 80D, 80CCD etc.) of the Income Tax Act, 1961.

However, it is essential to understand a few core concepts to carry out tax planning, it is an integral activity for budgetary efficiency and to carry out a sound financial plan in order to minimize your tax liabilities and have a surplus amount for savings. In a nutshell, tax planning is crucial as it offers several advantageous and you can even direct a portion of your taxable income to various investment plans and save on tax payments.

[Read: 5 ways of saving Income Tax in 2021]

Having said that, the government sets a cap on the amount of tax you can save in each section under the Income Tax Act of 1961. For example, the deduction cap under section 80C, which allows you to invest in tax-saving instruments, is currently Rs 1.5 lacs per annum.

The government announced a few important aspects on the tax front in the Union Budget FY2021-22 such as; the tax rates remaining unchanged, senior citizens above 75years of age are excluded from income tax filing and the ITR forms will have pre-filled data to ease the compliance for taxpayers.

On March 12, 2021, the Central Board of Direct Taxes (CBDT) issued a circular with regards to enhance the scope of Specified Financial Transaction (STFs). Beginning this financial year 2021-22 tax department will have direct access to information related to capital gains arriving from sale of mutual funds, dividends received on shares and interest earned by investors on bank deposits, post office savings and deposits with non-banking financial transactions.

The Income tax department issued a notification regarding this information to financial institutions such as banks, mutual fund houses, stock exchanges (BSE and NSE etc.), clearing corporations, depositories, registrars, bond issuers and share transfer agents. These entities are required to report transactions beyond the specified limit to the tax department in the financial year, details of capital gains made on listed securities and mutual funds.

Moreover, companies are required to provide information on dividends paid while the banks, post offices and NBFCs will provide details of interest earned. The tax authorities will have information for the just concluded financial year (2020-21), which will be verified against income tax returns filed by taxpayers.

Previously, the tax department used to seek such information only in cases of high-value transaction. The tax sleuths used to seek information on selective cases from the Securities Exchange Board of India (SEBI) such as purchase of shares, debentures, mutual funds, buyback of shares worth more than Rs 10 lacs on an aggregate basis during a financial year and transactions where market entities understated their gains.

Notably, due to lack of cross-referencing earlier of such transaction details there was under-reporting and potential evasion of taxes.

Whereas now following the new instructions, if you have earned capital gains by selling your mutual fund units, the same will be reported by the fund house to the tax department. Interest earned on bank or post offices deposits will also be reported to the tax department.

The aim of reporting transactions that exceed the prescribed limit is to enable the tax department to provide this information pre-filled in ITR forms to taxpayers, as announced by Finance Minister Ms Nirmala Sitharaman in her Budget speech for 2021. As a result, every transaction will be reported to the tax department and pre-filled forms will be provided to the taxpayer.

Currently, long-term capital gains on shares and mutual funds in excess of Rs 1 lakh a year is taxable. Dividends, interest and short-term capital gains are added to income and taxed at the marginal rate applicable to the taxpayer.

The revenue department has already started sharing this information of investors among its arms - direct tax, indirect tax and customs departments. The former revenue secretary Mr Ajay Bhusan Pandey elaborated this new practice saying, "The idea is to help taxpayers in preparing their tax returns and to prevent missing any transaction detail by mistake. In addition, it will ensure that there is no under reporting and taxpayers transactions are been reported to the tax authorities from time to time. Thus, it is better to disclose the gains while preparing for IT returns to avoid any complications at later stage."

Simply put, from now onwards if you are performing any transactions like redemption of mutual fund units and earning capital gains, interest earned and dividend paid or any transactions that are beyond specified limit will be disclosed to the tax authorities. Non-declaration of such income by you could get you in trouble as the tax authorities will have complete access to any gains you have made.

When it comes to tax planning for FY2021-22, you must be wary of those aspects where the tax department will have direct access to your gains, and you must select the tax-saving solutions that best serve your needs and minimise your tax liabilities. Besides that, when calculating your taxable income, you can switch between the old and new tax regimes, depending on which one lowers your tax liability.

The tax filing is done online and offline as well considering the current lockdown restrictions, many taxpayers are performing e-filing of IT returns. You need to register yourself first to the Income Tax e-filing portal and as mentioned earlier you will be provided a pre-filled data for filing your Income tax returns for FY2021-22 this will be available in Assessment Year 2022.

With these tax reforms for FY2021-22, it is essential that you consider planning a robust tax-saving strategy from the begging of this financial year to avoid any complications while assessing the taxable income.

You must tread cautiously, make valuable tax-saving investments in various investment avenues, and conduct financial transactions, which will ultimately help in reducing your taxable income. So that there is no risk of underreporting or tax evasion on your side, which the tax department could investigate due to the direct access granted to them.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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