Useful guide for year-end tax planning and tax Savings

With the Start of 2024, effective year-end tax planning becomes foremost. The period till the end of March presents a critical opportunity for individuals and businesses alike to assess their financial activities and make strategic decisions that could significantly reduce their tax liabilities. If you are unsure about where to begin, here are some helpful end-of-the-year tax planning tips.

Whether a seasoned investor or a beginner, this blog aims to help you make informed decisions that could lead to substantial tax savings and set a solid foundation for the upcoming financial year.

1. Donate to a cause

During the holiday season, consider contributing any extra funds you have to charity. This not only supports worthwhile causes but can also lessen your tax liability. The Income Tax Act's Section 80G makes provisions for individuals to claim deductions on amounts donated to certain approved entities, thereby lowering their overall tax liability.
The amount of the deduction you can claim depends on the specific fund or because you choose to support. Some donations are allowed for a total 100% deduction, meaning the entire amount donated can be subtracted from your total income before tax is calculated.
At the same time, others may only qualify for a 50% deduction. It is important to note that there is a cap on these deductions, limited to 10% of your gross total income, ensuring that the tax benefit is proportional to your financial contribution.
Moreover, the advantages offered under Section 80G are distinct from those under Section 80C, where individuals can already claim deductions up to ₹ 1,50,000 on specific investments and expenses.

2. Boost your retirement fund

If you invest in the equity market, you know that gains and losses are expected due to market fluctuations. Profits from selling securities are taxed as either short-term or long-term capital gains.
By adopting this strategy, you can route the benefits from these investments to your retirement returns, so your future is financially secure. Some examples of low-risk investments that can contribute to your retirement fund include tax-saving fixed deposits, the National Pension Scheme (NPS), the Public Provident Fund (PPF), and government bonds.
Alternatively, if you’d like to adopt a more balanced approach to risk, consider options like debt mutual funds or equity mutual funds. Investing in these instruments also qualifies for deductions under section 80C, so you can reduce your taxable income and thereby minimise your tax liability.

3. Consider loss harvesting

If you invest in the equity market, you know that gains and losses are expected due to market fluctuations. The market often swings significantly, leading to profits for some investors and losses for others.
Profits from selling assets like securities can be short-term or long-term capital gains, and like all earnings, they’re also subject to tax. If you’re not careful, your tax liability could skyrocket depending on the amount of capital profits you’ve made during the financial year.
Through a strategy known as loss harvesting, you have the opportunity to mitigate your tax on capital gains, potentially reducing it substantially or even to zero. Loss harvesting involves selling securities that are at a loss to realise capital losses, which can then be offset against your capital gains.
Should your capital losses exceed your gains, the surplus loss can be carried forward to offset against future gains for up to the next eight years after all gains for the current year have been neutralised. This provision under the current income tax laws allows for a balanced approach to managing your investment portfolio's tax implications.

4. Invest in insurance

An insurance cover is an essential part of financial planning in general and tax planning in particular. If you don’t have a life insurance or a term insurance plan, consider investing in one before this financial year comes to a close. Aside from the obvious benefit of a protective life cover, you can also enjoy tax benefits under section 80D.
The premium you pay for purchasing the insurance cover is deductible from your total income up to a maximum of ₹1.5 lacs. To know more about Term Insurance, check the website for various Term Plans offered by PNB MetLife.
Furthermore, you could also invest in a health insurance plan to claim an added deduction under section 80D. This section provides that the premium you pay for obtaining a health insurance plan for yourself or your family (kids and spouse) can be deducted from your total income up to a limit of ₹ 25,000.
In addition to this, if you’ve also purchased health insurance for your parents, you can claim the premium on that policy as a deduction up to another ₹ 25,000. If your parents are senior citizens, the limit goes up to ₹ 50,000.

5. Borrow funds for your short-term goals

You can also save tax by linking your financial goals with tax-saving investments. For instance, if you intend to purchase or construct a home in the coming year, you could avail a housing loan before this financial year comes to a close. That way, you can claim the principal component as a deduction under section 80C and the interest component as a deduction under section 24. With this, individuals can claim a deduction on the interest paid on a loan taken for purchasing, constructing, repairing, or renovating a residential property. This provision is designed to encourage homeownership and make housing more affordable for taxpayers.

Alternatively, if you are preparing to finance your children's higher education in the next year, consider taking out an education loan before the 31st of March. This strategy allows you to claim a deduction for the interest paid on the loan according to Section 80E of the Income Tax Act. The deduction under Section 80E is exclusive to the interest component of the education loan; the principal amount does not qualify for any tax benefit.

Conclusion

With these tax-saving tips, you’ll find that it becomes easier to reduce the burden of high taxes. And while last-minute tax-planning is certainly possible, keep in mind that tax-saving is generally an exercise that you need to indulge in over the course of each financial year, so you do not make any hasty decisions as the end of the year approaches.

The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.