How to plan your income tax smartly in the new financial year

The new financial year (FY) 2022-23 (i.e., April 1, 2022 to March 31, 2023) is finally here. Most of us leave our income-tax planning till the last minute. But it’s always better to start planning your taxes at the start of the year, just as you ought to take charge of your finances. Let us go through a list of different tax provisions which would help in planning for taxes for the year. Some of the provisions under the Income-tax Act, 1961 (the Act) which would be applicable to an individual taxpayer are outlined below:

Tax rates

The tax slab rates for FY 2022-23 have not changed vis-a-vis the last year and the highest slab rate remains at 30 percent. Additionally, surcharge (depending on the income level) and health and education cess (at 4 percent of basic tax and surcharge) will be applicable. Thus, the maximum marginal tax rate is 42.744 percent.

Deductions available for investments made/expenses incurred

Investment/contribution to provident fund, public provident fund, unit-linked insurance plan, equity-linked savings scheme (ELSS), Sukanya Samriddhi Scheme, 5-year tax-saving fixed deposit schemes, other specified investments, are eligible for a deduction up to Rs 150,000 under section 80C of the Act.

• Individuals may also invest in the National Pension Scheme (NPS) and can claim a deduction up to Rs 50,000 under section 80CCD(1B) of the Act.

• Payment towards medical insurance premiums up to Rs 25,000 for self, spouse and dependent children and up to Rs 25,000 for parents is allowed as a deduction. In the case of senior citizens, the limit is extended to Rs 50,000.

• A deduction is allowed towards interest paid on education loans taken for higher education subject to prescribed conditions. This deduction is allowed for eight years or till the interest is repaid, whichever is earlier.

• Donations to a notified organisation/fund are available as a deduction of up to 50 -100 percent of the donations made depending on the type of organisation/fund.

• Interest payments on loans taken for the purchase of a property are allowed up to Rs 200,000 for self-occupied property, while there is no limit for deduction in case of let-out properties. However, in the case of let-out properties, a loss of only up to Rs 200,000 is available for set-off in the same year and the balance needs to be carried forward for set-off against income from house property (up to the next eight years).

• Exemption on long-term capital gains (LTCG): In case LTCG on sale of land/building is invested in REC / NHAI / other notified bonds (up to Rs 50 lakh) within a duration of six months of the sale, such gains can be exempt.- An exemption can be claimed for LTCG on the transfer of a residential house property reinvested to purchase/construct another residential house property, subject to prescribed conditions.- Similarly, where sale proceeds of long-term capital assets (other than a house property) are reinvested to purchase/construct a house property, an exemption is available subject to specified conditions.

• Rent paid

• actual HRA received;
• actual rent paid as reduced by 10 percent of basic pay; or
• 40 percent/ 50 percent of the basic pay (depending on the location of accommodation).

• Rs 60,000;
• actual rent paid as reduced by 10 percent of total income; or
• 25 percent of the total income.

Any sum received by an individual, from any person (including an employer), and used towards COVID-19 medical treatment for self and/or family is proposed to be exempted, subject to certain conditions (as may be notified).

Additionally, any sum received by the family of a deceased person, within 12 months from the date of death is proposed to be exempted without any limit, if received from the employer and restricted to Rs 10,00,000 if received from any other person other than their employer. This amendment is proposed to be effective retrospectively from FY 2019–20.

Financial planning is bigger than tax-planning

Tax planning doesn’t always mean saving taxes by making investments, but it also means saving interest implications by paying taxes on time, i.e., by way of advance tax.

There is a requirement to make advance tax payments on your personal income (i.e., on interest, dividends, capital gains, income from house property, etc.) and salary income on which taxes have not been withheld. Advance tax liability is required to be discharged where the total tax payable after reducing taxes withheld (i.e., TDS) is in excess of Rs 10,000.

Hence, a taxpayer should ideally estimate his tax liability at the beginning of the FY and make requisite advance tax payments.

(Niji Arora, Senior Manager with Deloitte Haskins and Sells LLP and Zalak Shah, Deputy Manager with Deloitte Haskins and Sells LLP also contributed)