Planning Your Taxes Can Unlock Hidden Wealth

Does your tax-saving plan start in December and end with last-minute investments? You could be losing out on higher deductions and better returns

- S Vijaykrishnan

This article is not so much about prudent investment options as it is about getting your tax-saving plans right. Let us try to understand the problem, through the example of Mr X, who landed a job at an IT firm as a business analyst in FY14-15.

Mr X has a cost-to-company (CTC) of Rs 4,50,000, but is not aware about his tax liabilities and therefore, has not planned any tax-saving investments beyond the relief offered u/s 10 of the Income-Tax Act (transport allowance, medical allowance and LTA deductions) and his employee provident fund deductions.

Prima facie, Mr X’s approach might seem reasonable and his above deductions sufficient. Considering that his gross taxable income (after deductions) is below Rs 5 lakh, he is allowed a further rebate of Rs 2,000 u/s 87(a), which brings the final tax liability to Rs 4,819 (See Table 2), or a little over Rs 400 as monthly TDS. Naturally, he is unperturbed and fails to plan his investments. If we consider other factors such as performance bonuses, increments and others, the above math may fall flat, indicating that tax liability alone is not a prod for investment planning. If, for instance, Mr X also gets 10% of is CTC as a goodwill bonus in 2014-15 itself (it is taxable the same year), the tax liability could almost double to Rs 9,454 — and that’s after his Rs 2,000 rebate!

One increment later…