Advance planning of Income Tax

It wouldn’t be a New Year without resolutions. Whether it’s a prudent tax planning or firming your portfolio, the key isn’t making a list, it’s sticking with it. Here are some useful tips that one must follow to make new year tax friendly.

Plan your tax savings in time

Leaving tax planning for March may not be a wise idea. It will expose you to a decision taken in haste. Your tax-saving investments must depend on your financial needs and goals, and distributed among asset classes to reap the dual advantage of lowering tax burden and building your portfolio.

Section 80C: The maximum limit on tax deduction under Section 80C was raised from R1 lakh to R1.5 lakh. Contrary to the popular belief, Section 80C is not the only section that salaried class can use to save on taxes. One can claim deduction up to R30,000 on interest on a loan for renovation of a property. One can also claim deduction up to R5,000 on expenses on health check-ups, subject to the an overall limit in the Section 80D, under which deduction for medical insurance is available from R15,000 to R35,000, subject to conditions.

Selling investments: There are a few tax considerations that may be kept in mind before holding or selling investments in instrument such as stocks, mutual funds or real estate. If you sell an investment within a year, you would end up paying higher taxes. If you can, hold your investments a little longer. Also, if you have investments that have tanked since you bought them, you may consider selling them. Those losses can be deducted to offset your capital gains.

Real estate investment

The appreciating real estate prices in India exposes an investor to the capital gains tax. Section 54/54F of the Income Tax Act exempts tax on long-term capital gains. Taking a liberal view of the words, ‘a residential house’, various courts in India have held that the intention of the section is to promote investments in the residential property and allows investments can be made in more than one units. The section does not prohibit investments outside India. Many people have sold their property in India and invested in a property abroad. To annul the decisions of various tribunals and prevent exemptions in such cases, the loopholes in the Act have been plugged and the section now provides that only one residential house in India would be eligible for exemption, instead of a residential house anywhere in the world.

Time your travel with foreign fund

Tax impact on overseas salary can be mitigated by planning travel to and from India. One should keep a track on travel dates while leaving India for a foreign job and coming back a few years later. One must plan the journey back to India in a way that you become a non-resident in India the year you leave the country for the job. This can be achieved if your total stay in India that year is less than 182 days. Else you may have to pay tax in India on your overseas salary. In the year of your return on completion of overseas job, the threshold for residency is 60 days in a given tax year and a look-back period of 365 days in the immediately preceding four tax years.