Do not skip checking the conditions that are attached to most deductions. Used prudently, deductions can ensure a large tax free income, says Anil Rego
All investments proposed or made are analysed based on the returns. Ideally these would factor for the risk as investors are rightly concerned about safety and return on capital invested than just the returns on their capital.
An aspect that is commonly ignored in the quest for higher gain is the effect of taxes on the returns earned. Post tax returns are the final and real returns earned. Pre-tax returns are only nominal, not real returns.
A few suggestions on how to make your investment rupee go further and get you a final figure return worth considering.
1. Do not ignore the impact of tax on your returns, at your tax slab.
Calculate the final, post tax returns that your investment will earn. For example, 8 per cent taxable return will earn between about 5 and 7 per cent depending on your tax slab.
8 per cent tax free, as in the Public Provident Fund (PPF) is a full 8 per cent, no discount.
2. Do not miss opportunities to cut down the cost of your investment. Any discount earned impacts your investment in two ways: it pushes up your earnings beyond the stated rate as the returns are paid on the full value, while the discount is free money returned upfront.
The redemption amount is also the full value, without considering the discount given earlier.
Section 80C of the Income Tax Act provides deductions of up to Rs 2 lakh on qualifying investments and expenditure. Go the whole hog and do not leave any of your qualifying investment go unutilised.
3. Do not ignore the alphabet soup that goes from section 80C and goes to 80U.
Section 80D is a deduction on medical insurance premium paid.
80DD and 80DDB are for treatment of handicapped and specific diseases respectively.
Every tax payer should take advantage of 80D as planning for medical emergencies and the discount from the tax deduction.
4. Section 24 is a wonderful deduction. The interest paid on your home loan, up to Rs 2 lakh a year is deductible.
This deduction is on the cheapest loan an individual in India can avail!
If the home is bought jointly with your spouse you can double the deduction if both of you contribute to the loan EMI.
A good incentive to build an expensive and emotionally important asset, do not miss out on the tax break which will reduce your effective interest cost.
5. Keep a track of the purchase dates of your assets. Special rates are offered as ‘long term capital gains’ tax on assets held beyond a threshold.
Equity shares and equity mutual funds on which Securities Transaction Tax (STT) is paid offer tax free status on profits if they are sold after a year.
Property held for two years, as proposed in the Union Budget 2017-18 and other assets held for three years also qualify for long term capital gains status and substantially lower taxation,
Gains, or profits made can be set off against losses on other investments. Losses can also be carried forward for eight years.
Do not bury your past mistakes but track them to reduce taxes when you make profits.
6. Contributing towards making the world a better place gets a reward from the government.
Donations to qualifying charities get a deduction of the entire, or 50 per cent of the amount (depending on the kind of charity) donated, under 80G. Do not tighten your purse strings.
7. Do not delay your tax payments. Advance taxes are to be paid on your income four times a year. If you have income besides salary, calculate your dues and pay taxes in time.
Delayed payments cost interest and penalties.
8. Do not hide any income from the taxman. Besides payment of tax being a patriotic duty, the cost of being caught with income not declared can be expensive.
It is very difficult to hide streams of income as the income tax department has excellent technology to track your income.
9. Structure your salary for tax efficiency from perks.
Do not go with a vanilla salary structure when you can enjoy many legal deductions by routing purchases like a car and hiring a driver, through your employer.
Leave Travel Allowance (LTA), medical allowance and deduction for education will cut your tax bill.
10. Do not miss out on House Rent Allowance (HRA) for tax saving.
HRA in your salary can make a big dent in your tax bill. Taxes can be reduced by paying rent even to your parents or spouse, if they own the property you reside in.
Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.