The due date for filing income tax returns for most taxpayers is now behind us. While reviewing several tax returns, we observed some common tax leakages that investors should be aware of:
1. Avoid tax-inefficient investments if you are in the highest tax bracket.
Interest earned from bank deposits and most postal savings schemes is taxed at your marginal income tax rate. This can significantly reduce your post-tax returns. Depending on your risk profile and financial goals, consider allocating more towards relatively tax-efficient investments such as mutual funds.
2. Pay advance tax on time.
Many eligible taxpayers fail to pay advance tax despite having income from dividends, capital gains, rent, or other sources where there is no or inadequate TDS. This results in avoidable interest and penalties. Paying advance tax on the prescribed due dates helps reduce these unnecessary costs.
3. Make optimum use of NPS under the new tax regime.
One of the key tax benefits available under the new regime is the employer's contribution to the National Pension System (NPS). Where the employer offers NPS, contributions of up to 14% of basic salary may qualify for tax deduction, subject to applicable conditions. NPS is a market-linked retirement product that allows investors to choose an asset allocation based on their risk profile.
4. Review your housing loan strategy under the new tax regime.
Interest on a self-occupied house property generally does not provide the same tax benefit under the new regime. Therefore, depending on your overall financial situation, prepaying a housing loan may make financial sense.
5. NRIs should avoid maintaining large idle balances in NRO accounts.
Interest earned on NRO accounts is taxable in India. Where appropriate, consider using NRE accounts or tax-efficient investment avenues instead.
6. File your income tax return within the prescribed due date.
Timely filing is essential if you wish to carry forward eligible capital or business losses for future set-off. A loss reported on time can become a valuable tax-saving opportunity later.
7. NRIs should utilize benefits available under Double Taxation Avoidance Agreements (DTAAs). Depending on the provisions of the applicable DTAA and subject to furnishing the required documentation, NRIs may be eligible for relief from double taxation and, in some cases, lower tax rates on certain types of income.
8. Certain NRIs investing through NRE accounts may be eligible for capital gains exemptions.
Under specified provisions of the Income-tax Act (such as Section 115F), capital gains arising from certain foreign exchange assets may qualify for exemption if the sale proceeds are reinvested in specified Indian assets and the prescribed conditions, including holding periods, are satisfied.
9. Plan capital gains wisely.
Long-term capital gains from specified assets such as listed shares and equity mutual funds may, subject to conditions, qualify for exemption if invested in eligible residential property under the applicable provisions of the Income-tax Act. Professional advice is recommended before implementing such strategies.
10. Remember that NRE account benefits are linked to your residential status.
The tax exemption on NRE accounts generally applies only while you continue to qualify as a Non-Resident Indian. Once your residential status changes, the tax treatment also changes.
11. Finally, don't let taxes drive every investment decision.
Tax is an expense arising from earning income and creating wealth. Focus on maximizing long-term, post-tax returns through prudent planning. Manage taxes efficiently, but never resort to tax evasion.
At Naveen Rego Capital, a fee-only financial planning firm and a SEBI Registered Investment Adviser (RIA), tax efficiency is an integral part of the portfolio construction process. Our objective is not just to help clients earn better returns, but to ensure they retain more of what they earn by minimizing unnecessary tax leakages.
Earn well. Invest wisely. Minimize tax leakages.
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Happy Financial Planning!
Naveen Julian Rego – CFP®
MD & Principal Officer
Naveen Rego Capital
SEBI Registered Investment Adviser
Reg No: INA000019211
BSE Membership ID: 2178
Disclaimers:
- Investment in the securities market is subject to market risks. Read all related documents before investing.
- Registration granted by SEBI, enlistment as IA with Exchange, and certification from National Institute of Securities Market (NISM) in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
- Financial products recommended by us that are under the jurisdiction of other regulators are beyond the scope of SEBI’s grievance redressal mechanism.
- Kindly consult your tax practitioner for specific cases.
