Tax optimisation tips to maximise your I-T returns

STRATEGIC MOVES

Tax optimisation plays a crucial role in financial planning. With the fiscal year 2023-24 witnessing numerous changes in tax regulations, it’s imperative for both individuals and businesses to strategically plan their taxes. Let’s discuss effective strategies, helping you understand how to enhance your after-tax returns while adhering to the legal framework.

Let us explore some handy tips and strategies that can help you save on taxes. These are easy to understand and can make a big difference in your financial planning, whether you’re just starting out or have been managing finances for a while.

Tax harvesting: A strategy for capital gains

Tax harvesting is an astute strategy for managing and minimising capital gains taxes. It is a process where investors sell off investments that are underperforming or in a loss position, to offset the gains accrued from profitable investments. This technique is particularly advantageous in optimising tax liabilities. For Example, someone has a diverse portfolio, including stocks in various sectors. During the fiscal year, one of the tech stocks performed exceptionally well, resulting in a capital gain of ₹50,000. However, another stock in the automobile sector didn’t fare as well, and the person faced a loss of ₹20,000. By strategically selling the loss-making automobile stock, the person can effectively offset gains from the tech stock. This lowers net taxable capital gain to ₹30,000.

What’s crucial in tax harvesting is the timing and understanding of market movements. The decision to sell should be guided not only by tax considerations but also by the overall investment strategy and long-term financial goals. 

Spreading capital gains across financial years

This strategy involves planning the sale of shares or mutual funds to spread capital gains across two financial years, thereby reducing the tax burden in any single year. By doing so, investors can significantly lower their tax burden in any single year. It is particularly beneficial for individuals who are on the brink of a higher tax bracket, as it provides an opportunity to manage their taxable income more effectively. However, it’s important to note that this requires a keen understanding of market trends and the potential impact of such sales on the investment portfolio.

Utilising NPS under corporate benefit

This strategy offers a valuable opportunity for employees to maximise their savings and minimise their tax outgo. When your employer contributes to your NPS account, it counts as a separate deduction under Section 80CCD(2). This is particularly advantageous because it’s over and above the standard ₹1.5 lakh limit allowed under Section 80C. Essentially, this means you get to enjoy an additional tax-saving benefit without using up your 80C limit. 

Grandfather clause and benefits in mutual funds

Starting April 1, 2018, Section 112A applied to tax long-term profits from selling listed stocks through the stock market. This tax is for sales where you’ve paid the STT when buying and selling. It also includes stocks received as inheritance, gifts, or from ESOPs. If you hold the stocks for more than a year, any profit or loss is considered long-term; if less, it’s short-term. For inherited or gifted stocks, counting starts from when the original owner got them. The cost is either what you paid or, on January 31, 2018, the lower of the highest market price or your selling price. This rule also applies to inherited or gifted stocks, using the original owner’s cost. If your yearly long-term profit exceeds Rs. 1,00,000, after subtracting any long-term losses, you’ll be taxed 10% on that profit.

Choosing arbitrage funds for short-term needs

For short-term financial needs (6-12 months), arbitrage funds are more tax-efficient compared to liquid funds. While gains from liquid funds are taxed as per the individual’s tax slab if held for less than three years, arbitrage funds enjoy the benefit of being taxed as equity funds, leading to lower tax liability on short-term gains.

In conclusion, optimising taxes in India requires a comprehensive understanding of available tax-saving options and strategic investment planning. Regular updates on tax laws and consultation with tax professionals are essential for maximising after-tax returns.

(The writer is Founder, Managing Director and Chief Financial Planner at Dilzer Consultants Pvt Ltd)