Efficient tax planning is as important as smart investments in long-term wealth creation. With the new financial year kicking in, individuals should start as early as possible to ensure tax planning. The idea should be to not see it just as a year-end activity but as a recurring process with a long-term view. The earlier one starts, there is better chance to oversee its efficient implementation.
Here are some tips from tax planners and experts to follow in the current financial year:
Plan early
According to Sandeep Sehgal, Director - Tax and Regulatory, AKM Global, a tax and consulting firm, the beginning of the financial year is a perfect opportunity to do all the tax planning.
During this time, Sehgal opines, companies ask for investment declarations from employees for TDS deduction purposes. Hence, one can plan and execute religiously during the year.
Consider risk profile
Sehgal further advises that investments etc. which are done should be commensurate with the risk profile and risk appetite of the taxpayer and tax shall be a secondary consideration.
There are some tax-saving deductions, however, which are anyways absolutely necessary like term insurance, medical insurance of family, etc. These should be mandatorily opted for.
Keep the receipts
The receipts for investment/expenses etc. should be duly kept and maintained for any further inquiry by the tax department.
Check conditions
Wherever any conditions are specified for claiming an exemption, Sehgal says that one should be mindful of those, e.g. some provisions mandate payment through cheque and banking channel only and not through cash. Those conditions must be followed.
Choose the right tax regime
At the start of this financial year, an individual is required to choose between two tax regimes i.e. existing tax regime vs new tax regime which was announced in Budget 2020. Before doing any tax planning an individual must have a clear vision in his mind regarding which tax regime he/she wants to opt for as the tax rates, exemptions/deductions are quite different in both of the tax regimes.
According to Kapil Rana, Founder & Chairman, HostBooks Ltd, if individuals are opting for the existing tax regime, then they are eligible to claim deductions under chapter VI-A. They are not eligible to claim any deduction under chapter VI-A except 80CCD(2) if they are opting for the new tax regime.
Similar to deductions, if we talk about exemptions like Leave Travel Allowance (LTA), House Rent Allowance (HRA), if individuals are planning for some tour then they should keep in mind that LTA is liable for exemption only if they are opting for existing tax regime.
If individuals are staying on rent then they are entitled to take an exemption for HRA only if they are opting for the existing tax regime. Likewise, most of the exemptions are not available under the new tax regime such as exemption under section 10(14) except transport allowance to disabled employees, conveyance allowance, travelling allowance, daily allowance, allowance to MPs/MLAs u/s 10(17), an exemption in case of minor child income up to Rs 1,500 for each minor child u/s 10(32) etc.
Apart from the above, Rana says that if individuals don’t have sufficient funds to make an investment or if they don’t want to make an investment in order to maintain liquidity, then instead of opting for existing tax regime they should go for the new tax regime as the rates in the new tax regime are more beneficial.
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