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Business News/ Opinion / What not to do this tax season
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What not to do this tax season

While many a times getting things done much closer to the deadline is something we find ourselves doing, do spare a moment to think about what each section of the income-tax Act was intended for

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The tax season begins with a flurry of activity, triggered by an email from your human resources (HR) or payroll department. Externally, high decibel media campaigns by the retail financial services industry (read insurance and mutual fund companies) announce the “financial Diwali" season. In the rush that follows, mistakes such as buying a third insurance policy, investing another lump sum in Public Provident Fund (PPF), purchase of an obscure financial instrument which someone tells you will save tax, are made.

But before I pen some thoughts on what not to do this tax season, here are two basic thoughts as a precursor:

1) Many of us (including myself) have been guilty of simple slip-ups like forgetting to declare or submit proofs for basics such as the rent payments, health check-ups, or the premiums paid for parents’ health insurance. You are eligible to claim benefits on these, and not doing so because you forgot is probably among the easiest mistakes to fix.

2) While many a times getting things done much closer to the deadline is something we find ourselves doing, do spare a moment to think about what each section of the income-tax Act was intended for and think about whether the products or investments you are making are in sync with these sections. For instance, the objective of the 1.5-lakh deduction in section 80C is to force us to save for our future. Therefore, the single most important goal for the money that is put away under this head should talk to your objective of maximising your nest egg when you need it. The same goes for the other sections under which you can save taxes.

That being said, here is my list of things not to do.

Don’t fall for the sales pitch...

There are probably many things you are doing right; so, stick with the basics. There is no reason why the email from HR should send you into panic mode.

Evaluate if there is any possibility of saving further tax? For instance, you could be already saving sufficient amounts through your Employees’ Provident Fund (EPF) contribution, a compulsory deduction from your salary that counts towards the limits under section 80C. See if this already consumes the 1.5 lakh limit. If it does then there isn’t much point in evaluating alternatives because you can’t save any more taxes and neither can you replace this with another product (unless, of course, you are planning to quit working, in which case the EPF contribution will cease).

You could also have a home loan on which you are paying equated monthly instalments (EMIs). The principal amount of this counts towards savings under the same section. Similarly, there are a host of similar products that you may already hold—such as existing insurance policies (you are paying a premium on), a PPF account (you have made contributions to) or equity-linked savings schemes (mutual fund schemes with a lock-in and tax benefits)—wherein you may have invested earlier in the year.

...but also don’t miss out

In what is probably a very important development, the government is incentivising you to get enough health insurance. Allowing 25,000 instead of the erstwhile 15,000 as tax deductible, gives someone like me, a 40-year-old living in Mumbai as part of a family of four, the encouragement to go from a health insurance coverage of 7-10 lakh to over 15 lakh. And this additional amount is well and truly needed.

If you live in one of the bigger Indian cities, given medical inflation over the past decade, having 15 lakh for a family of four is not really excessive. Data indicates that most people who believe that their 2-4 lakh company provided health insurance is enough, have less than a third of what they actually need.

Then there is the National Pension System (NPS) with tax benefits under two sections—80C and 80CCD. Under the latter, you are permitted to save an additional 50,000 (over and above the section 80C limit of 1.5 lakh ). It’s a bit of a mixed bag given a very long lock-in period and significant restrictions on use of proceeds on maturity. Having said that, it has got a tax-saving section for itself, so if you can think of 50,000 as additional forced saving, it might not be that bad. There are even a host of products which no ‘seller’ touts, since there usually isn’t a sale to make at the end of it but these instruments go a long way in tax-saving.

Real estate benefits

Both the interest and principal component of the home loan you have availed can lead to big tax-savings. Apart from the benefit under section 80C, where an individual may claim a deduction of up to 1.5 lakh on the principal portion of a equated monthly instalment for the home loan, you can avail of an income tax deduction of up to 2 lakh on the interest portion of a home loan under section 24(b). Take a joint loan on a joint property and the benefit doubles. What if you were to sell a property?

You can avoid paying capital gains tax if you have sold a house in the current financial year and have made a financial gain, provided you had owned the property for more than 36 months post-possession. Your options are to use the capital gains proceeds to invest in a new property, invest in the construction of a property within three years or to invest them in specified bonds.

So, this year onwards, don’t panic your way to tax savings.

Manish Shah, co-founder and chief executive officer, BigDecisions.com

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Published: 24 Jan 2016, 11:46 PM IST
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