We often find that investors generally fail to plan and structure their investments and taxes optimally. This is not because of negligence or a lack of inclination, but more to do with the fact that one’s work keeps oneself so busy and preoccupied that financial planning becomes an exercise that is forever postponed to ‘next week’. Then, before you know it, March has arrived, and cursing under your breath, you make an appointment with the CA. He is doing the same as he knows you are not going to provide him with all required paperwork. Some last minute, convenient tax-saving investments are done and a resolution is made that next year is going to be different.
With March upon us, this is the last chance to act upon the 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. The following are some pointers to help you along the way.
Use the Fringe Benefits of Marriage!
In sickness and in health…..and in paying taxes too!
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 planning to buy a house on mortgage and 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 ladies there, we are not chauvinistic, it’s just for writing convenience. The situation could be reverse too 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. 2.50 lakh. This income, being below the tax threshold, will not be taxable. You ask how is such a miracle 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 @30%. If she earns it, its 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 an average savings bank rate of around 4%). If she were to invest the gifted funds into a fixed deposit at a rate of say 10% p.a., the difference of 6% p.a. will be tax-free between the both 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 Pockets, 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 2 lakh under Section 24 and a principal deduction of Rs 1.50 lakh under Section 80C. So totally between the both of you, up to Rs 7 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 20,000 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.
Tedious TDS
Last, but not the least, the most important thing to do is to aggregate your TDS receipts. Such TDS operates like advance tax already paid i.e. from your final tax liability, 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.
The authors are leading financial advisors. Write to them at [email protected]