Out, You Taxing Year!

Time and taxes wait for none! Yes, it’s a relief that 2020 is finally behind you, but its shadows still trail you… and exorcising those ghosts will be a special kind of task. We are left with less than three months to go before tax-saving investments are to be completed: the tax shaman must do his job before March 31! It’s going to be different this year, and you know why: 2020 was a rollercoaster ride for many. Some had their salaries reduced, others lost jobs, and many had to part with mini-fortunes to save kith and kin from COVID-19. Finances are in a mess, and consequently, so is tax and investment planning for 2020-21.

But it’s not an occult science, and let’s look at exactly how things are different this time. When normalcy prevails, you try to maximise tax benefits by spreading your investments through the year. That steady, planned approach helps you mop up the Rs 1.5 lakh deduction under Section 80C. The special set of situations you witnessed in 2020 threw that out of gear in specific ways. Outlook Money takes a look at a few case studies.

Job Loss

This is among the most extreme events that could have beset you in 2020. Too many crushingly immediate things swamp your mind space… trauma, incomprehension, loss of motivation at a career level, the sheer pressure of finding ways to fund day-to-day life. Understandably, tax planning is the last thing on your mind. But really, the first thing you should do in a job loss situation is estimate tax dues—look at income earned from fixed deposits, savings accounts, et al. If you have no other source of income except your salary, no significant tax saving may be required. In fact, you may be in a refund situation—the tax deducted at source from your fixed deposits is calculated according to your annual income slab.

“The first step would be to estimate the income earned from all sources and review Form 26AS for TDS entries. Based on how much tax is likely to be due, you can make tax-saving investments,” says Archit Gupta, Founder and CEO, ClearTax. The Form 26AS offers a consolidated view of your total income from various sources as a deductee.

The Income Tax Act allows deductions not only for savings but also for expenses. “Section 80C provides deduction in respect of various expenses an assessee incurs such as tuition fees, contribution to recognised provident fund and life insurance plans,” says Naveen Wadhwa, Deputy General Manager, Taxmann. Section 80E gives you a deduction for interest paid on loan taken for higher education during the year. Also, Section 80GG—relating to the payment of rent for the residence—provides deduction up to Rs 60,000.

Pay Cuts

This is, in some ways, even trickier to comprehend for the average Joe. What exactly is your tax liability in 2020-21? Did it go down or stay the same—even as you found your salary trimmed? Well, that depends on whether the reduction happened on your basic pay and HRA components. If those stayed untouched and your take-home became slender because allowances and other components were snipped, your liability remains the same. That also means your capacity to invest in tax-saving instruments has come down.

But saving taxes is a primary good, and the ways to do so stay reliably the same. Tax experts suggest that you minimise your liability by claiming reimbursements from your employers on billed expenditure wherever you can, freeing up as much money as possible. And then turn to the trusted 80C: you can purchase a life insurance policy for yourself, spouse or child, and claim a deduction on the premium. On home loans, claim deduction on the principal paid. Kapil Rana, Founder & Chairman, HostBooks,  explains that you can also buy a medical insurance policy for yourself, spouse, dependent children or parents and claim deduction on the premium under Section 80D subject to the specified limits.

Medical Emergencies

An unforeseen event in this tax year may have hampered your saving capacity—and that can only have cast the need to plan in sharper relief. Consider getting a mediclaim policy. In case you already have one, consider topping it up to increase the coverage. Many individuals are not aware of health benefit plans launched by the Indian government.

“Ayushman Bharat is a mediclaim policy with a coverage of Rs 5 lakh for each family, and is targeted to cover 10.74 crore individuals and their families as per the latest Socio-Economic Caste Census (SECC) data covering both rural and urban households,” says Suresh Surana, Founder, RSM India. Section 80D provides a deduction for expenditure incurred on the medical treatment of a senior citizen (60 years or above) who is not covered under health insurance. The medical expenditure can be incurred by a taxpayer for himself, spouse, parents or dependent children. Further, preventive health check-ups are eligible for deduction under this provision.

You Didn’t Plan

Maybe the disarray brought by COVID-19 was such that tax investments were the furthest thing from your mind. If you fit that bill, you may consider opting for the old tax regime and claim benefits on necessary expenditures or the standard deduction. Some kinds of expenditure are deemed essential and universal, and tax benefit can be claimed on those without requiring any additional investment.

For instance, most married taxpayers may be incurring expenditure for the education of their children. Taxpayers can claim benefit for tuition fees paid to any university, college, school or other educational institution in India, for full-time education of any two children, under section 80C of the I-T Act. “The Act provides for exemption on children’s education allowance and hostel expenditure allowance, restricted to Rs 100 per month and Rs 300 per month, respectively, up to a maximum of two children,” explains Surana.

Old Vs New Regime

To add to the confusion, Budget 2020 offered variety. You can choose to stay with the old tax regime: this has higher tax rates but allows the old deductions and exemptions. Or you can migrate to a new one that has lower rates but knocks off deductions and exemptions, except for NPS (New Pension Scheme) contributions by employers. To choose between the two, you must figure out the liabilities—taking into consideration factors like salary cuts, the pandemic’s effect on your investments, and liquidity requirements. “The driving factor will be deciding between tax-saving investments versus liquidity to spend. The taxpayer must evaluate both regimes, ” says Raghunathan Parthasarathy, Associate Partner (Tax & Regulatory Services), BDO India.

Surana adds, “The effective tax rate under the old tax regime would be nil for income up to Rs 5 lakh after taking into consideration the rebate available under Section 87A.” So investors with income ranging between Rs 5 lakh and Rs 15 lakh may consider opting for the new concessional tax regime, as the maximum benefit under the scheme is Rs 78,000 for any level of income. Apart from PPF,  NSC, FD for five years or more, mutual funds, Sukanya Samridhi Yojna that offer deduction under section 80C up to Rs 1,50,000 and various other products can maximise your tax benefits.

Mistakes To Avoid

Generally, it is advisable not to leave tax saving to the last quarter of the year as you could end up with investments in less yielding schemes. This year is tricky, but start tax planning early, advises Wadhwa. A taxpayer should not ignore the regular expenses eligible for tax deduction: medical expenditure, children’s education, rent, interest on the home loan, interest on education loan, donations and so on. You need to diversify your investments to avail benefits of deductions under different sections. Look out for tax-inefficient schemes. For instance, a common strategy of taxpayers is to invest in FDs or NSCs where they can claim one-time exemption. But then, the interest income is taxable every year, which ultimately makes them tax-inefficient schemes.

This year has been extremely challenging for most of us. As taxpayers, we need to be extra careful while filing returns since modes of income may have undergone a sea change, and it’s important to disclose every source that has helped sustain you through the year.

But it is now time to forget the past year, and think about 2021. Remember, and we repeat it, the best way to avail maximum benefits is to plan and file returns on time, instead of delaying it till the end of the deadline. You cannot make hay after the sun sets—and even those few bundles of straws are crucial this year.

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Unemployment Stress

Khushali Pandit, 31 Service Industry

The worst part of this scenario is that no one knows how long it will last. In times like this, wherein I have lost my job, the first thing that I have done is to maintain emergency funds. The pandemic has financially hit me. I had to change my decisions regarding investments, tax payment, and implement cost-cutting on my needs. I had plans of investing in mutual funds; instead, I had to break some of my fixed deposits. I’ll be filing nil return for the first time since I started earning. Now, I have to find myself a new attractive job before I restart investing in fixed deposits and mutual funds.

Pandemic Pay Cut

Ankita Jain, 27 Financial Analyst

COVID-19 brought with it unexpected uncertainties in both income and expenses. Minimising expenses were a significant part of our financial management. We planned to emigrate to another country in 2020, and our savings were dedicated to it. With this global crisis, it became mandatory to shift our financial decisions radically, accounting for the unforeseen. Short-term emergencies, planning for family health and safety... these took priority. With limited expenses, managing everyday finances wasn’t challenging. However, investments were impacted a bit; we had to exit a SIP that was designed to be 15 per cent of our monthly salary to accommodate the cut. The bigger fear, given such uncertain times, was a job loss. Hence we tried to save as much as possible.

Sustaining Self Employment

Purva Dayma, 34 Self-Employed

My regular earnings were impacted immediately by the lockdown. The first thing I ensured was to curtail expenses. Being self-employed, I plan my tax-saving investments from the beginning of a financial year. These include starting a SIP in an ELSS or a new fixed deposit. Despite such careful planning, these investments have a lock-in period ranging from three to seven years, which impacted cash flow and savings in this crisis year. Now I may think of letting go of my tax savings a little to create additional liquidity to pay off my loans and reduce other commitments. It was not possible to initiate tax planning this year. Now, with things becoming more normal, I have again started planning my investments efficiently.

himali@outlookindia.com