Fenil's Library

We’re in December. Done your tax-planning yet?

Starting early helps obviate the hassles at the fiscal end

Sandeep Shanbhag

I find that investors at large fail to plan and structure their investments and taxes optimally, not so much because of negligence or a lack of inclination as much as because they are so busy with their work and so preoccupied that financial planning keeps getting forever postponed to the next week. Then, before they know, March arrives… and they must rush to make an appointment with the chartered accountant. Some last minute, convenient tax-saving investments are done and a solemn resolution is made that next year is going to be different.

With December already upon us, it is as good a time as any to act upon this resolution. The trick is to start early and take the necessary actions step by step. Tax-planning is at all times a process and not a one-time, sporadic exercise.

Here are a few things to keep in mind as you go along. • Well begun is half done

That you are reading this with interest (and intention hopefully) is in itself a big thing. Since you are starting early, you have time on your side. And believe me, time is a great ally. Slowly and surely, act upon these pointers (whichever is applicable to you) and perhaps you won’t even need your CA’s appointment come March.

The following, in my experience, is a list, of aspects largely neglected by most investors. • Use the fringe benefits of marriage

In sickness and in health… and in paying taxes too!

The wedding vows are done, the honeymoon is over and reality has begun. I should know, for I have been married over ten years now. However, I did discover a silver lining — marriage helps in reducing taxes substantially.

But first, some ground work has to be done. Have separate joint accounts, one for husband and wife and the other for wife and husband, even if one of them is not assessed for income tax. This may sound trivial but actually is of great importance for proper tax planning. This is especially important if you have or are planning to buy a house on mortgage and would like to benefit from the tax breaks • Loan to spouse

You are in the highest tax bracket and she doesn’t have taxable income. (For all you working and earning ladies there, I am not chauvinistic; it’s just for writing convenience. The situation could well be the reverse, and the same principle would apply)

Anyway, it is vital to start a tax file in her name. The idea is that she starts earning income up to Rs 1.80 lakh (Rs 1.50 lakh for males). This income being below the tax threshold will not be taxable. You might ask how such a miracle is possible that your wife starts earning so much overnight. She doesn’t. You transfer money to her, which you would have otherwise invested in your name. If you earn it, you pay tax @34%. If she earns it, it’s going to be tax-free.

But there is a glitch. You cannot transfer money by means of giving her a gift. The problem is that income on such gifted amount will be anyway clubbed in your hands for tax purposes. How do you work around this situation? Well, give her a loan. Though an interest-free loan is technically possible, it is better to have an arm’s length contract by charging a nominal rate of interest (say savings bank rate of 3.5%). If she were to invest the gifted funds into an FD at a rate of say 10% p.a., the difference of 6.5% p.a. will be tax-free between the two of you.

Housing finance

Marriage has benefits even when buying a house. Are you planning to buy a house anytime? Then, even if you are Mr Deep Pocket, it is better to opt for housing finance. Tax breaks are available only on borrowed funds, and not on the use of your own equity.

Since real estate can be co-owned, buy the property with both having an equal share. The loan should also be taken equally and the interest and principal payments for the same should be made separately by each from their respective bank account.

If the above is carried out, each is entitled to an interest deduction of up to Rs 1.5 lakh under Sec 24 and a principal deduction of Rs 1 lakh under Sec 80C. So, between the two of you, up to Rs 5 lakh of income will escape tax.

Mediclaim

Mediclaim is a must for all, taxpayers or otherwise, rich or poor, young or old, in view of the high cost of hospitalisation. If you haven’t bought a Mediclaim policy so far, do so now. There is a tax break of Rs 15,000 available, but that is not the point. Mediclaim is for the financial protection of you and your family members — the tax cut is just an added benefit.

Public Provident Fund (PPF)

In the absence of government social security, a regular PPF investment works like a safety net for the later years. This is especially true in the case of the self-employed who do not have a company provident fund to fall back upon. A sum of Rs 70,000 invested per annum can net you over Rs 32 lakh over 20 years.

Tedious TDS

Last but not the least, the most important thing to do is to aggregate your TDS receipts. TDS operates like tax already paid from your final tax liability, and you have to pay only such amount that is over and above the tax already deducted. Do this as the year goes along. Most leave this exercise towards the end of the year, leading to huge inconvenience and short counting.

To conclude

You will appreciate that the above-mentioned points are really commonsensical and do not need much of one’s time and effort to put into practice. However, these baby steps have a way of adding up and sometimes make all the difference between financial health or the lack of it.

sandeep.shanbhag@ gmail.com