Why You Should Begin Tax Planning Early
Jul 17, 2017

Author: PersonalFN Content & Research Team

As we fast approach the tax return filing deadline, there are tax-paying individuals scurrying around to file their income tax returns. While the ones who had planned their taxes earlier are relaxed, there are the others who might have missed out on availing of certain tax exceptions.

No one wants their hard-earned money to be engulfed by tax liabilities.

This is why you need to undertake tax planning at the start of the financial year. If you’ve not already done so, it’s not too late to start now.

A good way to begin tax planning is to identify any changes in your personal situation that could affect your tax outgoes. An increase in age, higher income, change in profession, availing of a home loan, or other life events are likely to have a tax impact. Similarly, any changes in tax laws too can have a beneficial or detrimental impact on your financial plan.

For the current financial year, the tax rules favour smaller taxpayers. While the tax slabs have remained unchanged, the tax rate for the first income tax was reduced to 5% from 10%. To make good the losses in tax revenues, the government introduced a 10% surcharge for income between Rs 50 lakh to Rs 1 crore. Those with income under Rs 50 lakh will benefit from lower taxes of upto Rs 12,500.

Some key changes to the income tax structure for FY2017-18 as highlighted below:

Income (In Rs) Changes
Between 2,50,001 – 5,00,000 Tax rate reduced to 5% from 10% earlier
Above 5,00,000 Taxes will reduce by Rs 12,500 for individuals under 60 and by Rs 10,000 for senior citizens
Below Rs 3,50,000* Rebate under Sec 87A: Slab reduced to Rs 3.5 lakh from Rs 5 lakh. Maximum rebate eligible Rs 2,500, down from Rs 5,000 earlier
Between 50 lakh – 1 crore 10% surcharge
Above 1 crore 15% surcharge

The deductions available to taxpayers under Chapter VI A remain unchanged. This includes the deductions available under Section 80C , 80D , 80E, etc.

So from a tax planning point of view, if your tax status has remained the same, there is little need to adjust your tax plan. Nonetheless, to achieve vital financial goals, viz. buying a dream home, a car, an international vacation, planning for children’s future, and even your own retirement, getting personal finances in order and indulging in effective tax planning right at the beginning of the financial year is extremely important, no matter how mundane or humdrum this may sound.

Benefits of tax planning early:

  1. Plan with the right tax-saving product and benefit from the power of compounding

    In the process to save tax, don’t focus merely on reducing taxes. It is imperative to keep a long-term view.

    Compliment tax planning with investment planning. This will help you achieve your financial goals holistically, while saving tax as well. There are a number of tax-saving investment avenues, but it is vital to own the ones that ensure your financial wellbeing. The earlier you start, the more you will benefit from the power of compounding .

    If you are in the early stages of your career or in a higher-income group, your willingness to take risk is high. You may consider investing in market –linked investments. The risk is high as these products have an equity component. Carefully assess the equity allocation before investing. In case of ULIPs and NPS, you have the option to vary the equity exposure. Under ELSSs, the exposure to equity usually remains above 80%.

    Conservative investors can choose fixed income investments. However, they should be aware of the lack of liquidity that comes with these products. Based on your risk-appetite and liquidity needs, you may allocate your investments over the products mentioned below.
    Options Galore - Snapshot of Section 80C
    Schemes Tenure Current Tax on returns
    Market-linked Investments
    Equity Linked Savings Scheme (ELSS) Term: Ongoing; Lock-in-period: 3 years Dividend & Capital gains are tax free
    Unit Linked Insurance Plans (ULIPs) Term: 10 - 20 years; Lock-in-period: 5 years Capital gains post lock-in are tax free + maturity amount would be tax-free (exempt) as per Section 10(10D)
    National Pension System (NPS) 30-35 years Capital gains taxed on withdrawal
    Fixed-return Investments
    Public Provident Fund 15 years / partial withdrawal allowed Interest income is tax free
    Sukanya Samriddhi Scheme 21 years or on marriage of daughter / partial withdrawal allowed after 18 years of age Interest income is tax free
    National Savings Certificate 5 years Interest accrued is taxed every year as per one’s income-tax slab
    Bank Deposits 5 years
    Post Office Time Deposit 5 years
    Senior Citizens Savings Schemes 5 years
    Non-ULIP Insurance Plans 5-40 years Redemption amount is tax free
    (Source: PersonalFN Research)

  2. Benefit from regular investing

    If planning your taxes, you can calculate the monthly investment needed. This will avoid a huge lump sum outflow at the end of the financial year. Especially, when investing in a tax-saving mutual fund, it is pertinent that you invest in a staggered manner as opposed to a one-time investment.

    Our analysis found that investors would end up accumulating a lower number of units nearly 70% of the time when they invested only in the last three months of the financial year, as compared to investing the same amount over the entire year. (Read: How Opting For Tax Saving Funds At The Last Minute Can Spell Disaster )
  3. Optimise all available options for tax saving

    There are several deductions available to taxpayers. Hence, it will be beneficial to look at all the deductions available to boost your tax savings. Apart from the investment options, there are several other expenses you can claim a deduction on, such as payment of tuition fees for upto two children, home loan repayment, health insurance premium, medical expenses for treatment of certain diseases, donations, etc.

    Under Section 80CCD, you can save an additional Rs 50,000 through the National Pension System (NPS). Similarly, under Section 80D, you can claim a deduction of upto Rs 25,000 p.a. for health insurance premiums. Your donations to specified funds and charitable trusts, too, are exempt (fully or up to 50%) under Section 80G.

    Knowing this will help you plan your taxes better and ensure you make the best use of the deductions available. Below is a list of deductions available under Chapter VI A of the Income Tax Act.
    Snapshot of deduction under Chapter VI A
    Section Quick Description of Deduction Deduction limit
    80C* Key investment instruments eligible for deduction under this Section include – Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), EPF (Employee Provident Fund), NSC (National Saving Certificate), Senior Citizen Savings Scheme (SCSS), 5-year tax saving bank fixed deposits, 5-year Post Office Time Deposit (POTD) , premium paid for life insurance plans, housing loan principal repayment, etc. A maximum of Rs 1.50 lakh p.a.
    80CCC* Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred in section 10(23AAB). A maximum of Rs 1.50 lakh p.a.
    80CCD* Contribution to Pension Scheme (National Pension Scheme) notified by Central Government. Rs 1.50 lakh p.a. + vide sub-section 1B an additional deduction of up to Rs.50,000 is allowed for contribution towards NPS by the employee.

    If the employer has contributed to the NPS on behalf of employer, under Section 80CCD(2) the deduction eligible is: 10% of the salary of an individual.
    80CCG Investment made in Rajiv Gandhi Equity Savings Scheme (RGESS) 50% of the amount invested
    80D Premium paid for medical insurance Maximum upto Rs 25,000 for non-senior citizens and Rs 30,000 in case of senior citizen.
    80DD Maintenance including medical treatment of a handicapped dependent who is a person with disability Rs 75,000, irrespective of the amount incurred or deposited. However, in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh shall be allowed.
    80DDB Expenditure incurred in respect of medical treatment Actual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in case of senior citizen, whichever is lower. But for those with age 80 and above, classified as very senior citizens, the eligible deduction is Rs 80,000
    80E Repayment of loan taken for pursuing higher education Maximum deduction for interest paid for a maximum of 8 years or till such interest is paid, whichever is earlier
    80G Donations to certain funds and charitable institutions Maximum deductions allowed can be 50% or 100% of the donation, subject to the stated limits as provided under this section
    80GG Rent paid in respect of property occupied for residential use Maximum deduction allowed is least of the following: Rs 2,000 per month; 25% of total income; Excess of rent paid over 10% of total income
    80GGC Contribution made to any political parties or electoral trust Amount donated to political party is fully exempt
    80T Interest earned on savings bank deposits A maximum of Rs 10,000 or actual interest, whichever is lower
    80U Person suffering from specified disability(s) Rs 75,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh is allowed.
    *The deduction limit is upto Rs.1.5 lakh aggregated across section 80C , 80CCC, 80CCD(1)
    (Source: Personal FN Research)

  4. Optimise your salary allowances to save tax

    There are several salary allowances that you can take benefit of. Taking note of these allowances and the impact on your tax outflows will help you optimise your financial budget. You may even restructure your allowances if necessary.

    Every year tax rules changes, thus when you file your returns early, you may get ideas on how you can save tax better for the current financial year. You will be able to better optimise tax deductions available. In addition, you can inform your employer if you wish to alter and optimise your salary structure to save more tax. You can structure your salary to suit your needs and expenses. For example, if your job requires you to travel a lot, you can ask your employer to include a higher conveyance allowance.
  5. Prepare for tax outflows at the end of the year

    If you are salaried, most companies deduct tax in the last quarter of the year. Thus after accounting for all deductions, if tax is payable, this will be deducted from your salary. Therefore, it is important to work out the tax payable in advance, after availing all eligible tax rebates. If there is a high tax outgo, ask your employer to deduct the tax on a monthly basis from your salary.

    To help you plan your taxes better, here are the income tax slabs for FY 2017-18

    Income tax slabs for AY2018-19

  1. In case of every individual (other than resident individual who is of the age of 60 years or more at any time during the financial year 2017-18) -
    Income (In Rs) Tax Liability (In Rs)
    Upto 2,50,000 Nil
    Between 2,50,001 – 5,00,000 5% of income in excess of 2,50,000
    Between 5,00,001 – 10,00,000 12,500 + 20% of income in excess of 5,00,000
    Above 10,00,000 1,12,500 + 30% of income in excess of 10,00,000

  2. In case of resident individual who is of the age of 60 years or more but less than 80 years at any time during the financial year 2016-17
    Income (In Rs) Tax Liability (In Rs)
    Upto 3,00,000 Nil
    Between 3,00,001 – 5,00,000 5% of income in excess of 3,00,000
    Between 5,00,001 – 10,00,000 10,000 + 20% of income in excess of 5,00,000
    Above 10,00,000 1,10,000 + 30% of income in excess of 10,00,000

  3. In case of resident individual who is of the age of 80 years or more at any time during the financial year 2016-17 -
    Income (In Rs) Tax Liability (In Rs)
    Upto 5,00,000 Nil
    Between 5,00,001 – 10,00,000 20% of income in excess of 5,00,000
    Above 10,00,000 1,00,000 + 30% of income in excess of 10,00,000

    In addition to the tax payable, there will be a:

    Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.
    Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.
    Education cess: 3% on total income tax, including surcharge

Now that you know of the benefits of starting your tax planning exercise early, here are a few pointers to help engage in prudent tax planning:

Last minute tax planning can lead to lower savings and inefficient investments. PersonalFN is of the view that you need to plan your taxes at the start of the financial year, to see where you stand and make adjustments accordingly. It is important for you to know the various routes to save tax on your income. You need to check whether you are on the right track towards saving on taxes and to take timely action in case you have missed any benefits.

You can take help of a financial planner to suggest the best tax-saving products that not only help you save tax, but that can be aligned to achieve your financial goals as well. It would therefore be worthy to reach out to a Certified Financial Guardian – a mark of trust and respect, who can counsel and handhold you to streamline your personal finances prudently.

You can also access Personalfn EPF calculator here.

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