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Earning big bucks? Don’t switch slabs; optimise existing tax benefits first

If you are a rich salaried individual and yet struggle to use all deductions and exemptions, you need to improve your awareness levels and investment habits

February 06, 2020 / 11:15 AM IST

Over 90 per cent of the tax-payers claim deductions of less than Rs 2 lakh, according to some number crunching done by the central government. On the basis of these figures, it is confident that a switch to the new tax regime – which prescribes lower tax rates and revised slabs – will be beneficial for most tax-payers.

According to PTI, the government has taken into account several tax breaks for the purpose of this analysis. These include deductions under section 80C (provident fund, life insurance premium, public provident fund etc.), section 80D (health insurance premium), section 80CCD(1B) (NPS contribution), section 24 (housing loan interest) and standard deduction. If fully optimised, the combined value of these deductions is over Rs 4.25 lakh.

It is not clear whether the calculations have factored in exemptions such as leave travel allowance (LTA) and house rent allowance (HRA). After all, annual rent in a metropolitan city such as Mumbai can be way beyond Rs 17,000 per month (over Rs 2 lakh a year), which means that the HRA exemption itself could exceed this limit. Also, even a relatively small Rs 25-lakh home loan with a tenure of 20 years and interest rate of 8 per cent will entail annual interest of around Rs 2 lakh in the initial years.

According to media reports, only around 3.77 lakh individuals avail of deductions of more than Rs 4 lakh. So, does that mean that the rest – a vast majority of taxpayers – should move to the new tax regime to lower their tax outgo?

Now, those who earn less than, say, Rs 10 lakh could argue that their income is not adequate to maximise tax savings, as they have expenses such as household spends and children’s education fees to manage. Such individuals might find the new tax regime less taxing. However, those in the highest tax slab – drawing over Rs 15 lakh per annum (taxed at 30 per cent under both regimes) – can certainly not take refuge behind the argument.


Save more, don’t switch

Financial planners, in fact, recommend focusing on savings for all income brackets, including those drawing modest salaries. Even if tax-payers are not optimising their deductions at present, going by government data, it does not follow that they should not get better with tax-planning in future too. “They should not use the new tax regime as an escape route, as tax-saver investments can help them save for their long-term goals,” says financial planner Mrin Agarwal. “Largely, it is inertia and procrastination that lead to under-utilisation of tax benefits.” If you are a rich salaried individual and yet struggle to use all deductions and exemptions, you need to either improve your awareness level or savings and investment habits.

Start early and ensure that tax-planning supplements your financial planning rather than feature as an annual ritual in your calendar. In fact, you might find that your children’s tuition fee and your monthly provident fund contribution are capable of exhausting the 80C limit of Rs 1.5 lakh.

Consider making voluntary provident fund (VPF) and public provident fund contributions or starting a systematic investment plan (SIP) in an equity-linked saving scheme (ELSS) right at the beginning of the month. “Save and invest soon after you receive your salary and spend later. Unbridled spending and absence of forced savings will come to haunt you later when you have to arrange funds for children’s higher education or to buy a house,” explains Agarwal. If you are able to put your finances in order and invest more, you will be better off in the old tax regime.

Maximise options beyond 80C

You can also take tax breaks beyond the Rs 1.5 lakh under section 80C.  “A tax-payer would be a gainer in the new regime if he was availing deduction of only Rs 1.5 lakh under the old regime,” says Taranpreet Singh, Partner, TASS Advisors. However, the math will change if you claim multiple deductions aggregating to at least Rs 2.5 lakh.

In fact, if you claim tax breaks of over Rs 3 lakh, you can net sizeable tax savings (See: Wealthy, but poor with tax planning? Save more, don't switch). “In India, we do not have a social security mechanism where you pay taxes and the government takes care of you in times of need – for example, during retirement or temporary phase of unemployment. So, you have to save to insulate yourself against any crises by investing optimally,” explains Kuldip Kumar, Tax Partner, PwC India.

Apart from investing Rs 1.5 lakh in section 80C-instruments, you can contribute up to Rs 50,000 to NPS and claim this additional deduction under section 80CCD(1B). If you are repaying a home loan, the principal component is entitled for deduction under section 80C, while the interest paid, of up to Rs 2 lakh, is a deduction under section 24(B).

No-stress, tax-savers

Many highly-paid individuals might not even have to set aside a specific sum to claim 80C deductions. Their provident fund contribution – up to 12 per cent of your basic salary – by itself might be able to exhaust the Rs 1.5-lakh cap. If your annual remuneration is Rs 25 lakh per annum, of which the basic is Rs 12.5 lakh (50 per cent), your PF contribution by itself will work out to Rs 1.5 lakh.

If you live with your parents, you can pay them rent and claim your HRA. However, be mindful of the fact that it will be taxable in the hands of your parents.

Ensure that you have a health insurance cover in place for yourself and your family, even if you are covered under your employer’s group health scheme. The independent cover’s premium will also help you claim deductions of up to Rs 25,000 under section 80D. Paying parents’ medical premiums will entitle you to deduction of an equivalent amount. If they happen to be senior citizens, the limit is Rs 50,000. “Many bought health covers only to avail deductions, but at least they had an independent policy. In the new regime, they might not do so as they look at it as an outgo that yields no ‘returns’,” points out Agarwal.

This apart, many tax-payers contribute to their parents’ healthcare expenses. These are routine expenses related to doctors' consultations, pharmacy bills, diagnostic tests, Gluctometer strips and so on. If your parents are over 60 and do not have a health cover, these expenses qualify for deduction under section 80D, to the extent of Rs 50,000, provided they are not covered by health insurance.

A word of advice

The advice on investing more and controlling expenses is also applicable to those who draw relatively modest salaries. Staying tight-fisted on spending can ensure a huge reduction in tax outgo. For instance, if your total income is Rs 10 lakh, deductions and exemptions of Rs 5 lakh can push your taxable income down to Rs 5 lakh. You will then be eligible for the rebate, which will eliminate your tax liability. The Rs 5-lakh tax break assumption covers HRA (Rs 2 lakh), standard deduction (Rs 50,000) section 80C (Rs 1.5 lakh), health insurance premium (Rs 10,000), LTA (Rs 50,000) and NPS (Rs 40,000). It might not be as difficult as it sounds. “If you are a double-income family, household and lifestyle expenses will be shared, leaving more room for higher savings and maximising tax concessions,” says Ameya Kunte, Founder, GlobeView Advisors, a tax consultancy firm.

Finally, though, you must ensure that tax planning is a well-thought-out element of your overall financial planning process. Tax benefits will mean very little if you have to borrow to make tax-saver investments at the last minute due to inadequate savings through the year. Or, you give in to distributors who promise to take care of all the paperwork at the last minute, but sell low-yielding, long-term endowment policies that you cannot liquidate easily.
Preeti Kulkarni
first published: Feb 6, 2020 09:18 am

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