ATM :: Don’t fall into liquidity trap to save more on taxes: Experts

By Preeti Kulkarni, ET Bureau | 17 Jul, 2014, 10.30AM IST | Economic Times


Get ready to revise the proposed investment declaration you had submitted to the human resource (HR) department in April. The two proposed changes in personal taxation in the Budget — enhanced limit for tax-saving investments under Section 80C to Rs 1.5 lakh and interest on housing loan to Rs 2 lakh — will have an impact on salaried tax-payers and they will have to revise their declaration to get the extra tax benefit immediately. However, you may have to wait till the Parliament passes the Finance Bill.

Budget proposals do not become a law immediately. That happens only after both the Houses of Parliament pass the Bill and the President of India gives his assent,” explains Vaibhav Sankla, director, H&R Block.

Typically, the Union Budget is presented in February, and the changes in taxation come into effect from the next financial year. This year, it was delayed due to the elections and the changes will be effective in the current fiscal. Employers are likely to send e-mails seeking revised declaration sometime next month.

Save More for Tax Benefits

Yes, saving that extra Rs 50,000 on taxes under Section 80C is a heady feeling. But, before filling the proposed investment declaration, evaluate whether you can actually make that investment. You will have to save more to earn the deduction. Unfortunately, your income and expenses remain the same. Work with actual numbers to figure out whether it will be possible to save extra Rs 50,000.

“Take into account your likely expenses in the next few months to ascertain whether you will be able to direct an additional Rs 50,000 towards tax-saving investments,” says Suresh Sadagopan, certified financial planner and founder, Ladder7 Financial Advisories. You can also consider adopting a staggered approach.

If you feel that setting aside an additional amount for claiming tax benefits may affect your shortterm cash flows, consider other options too. “For example, though repayment of housing loan principal is eligible for deduction, many taxpayers do not claim the benefit as their contribution to EPF corners a large part of the limit. Now, with an enhancement in this limit, they can avail of tax relief on the principal repayment,” he adds. Similarly, you can factor in the tuition fees paid to your children’s school too. Instead of setting aside additional funds, evaluate such options or consider forgoing a part of the savings on tax outgo, to ensure comfortable liquidity.

Your decision may impact your future financial plans. For example, choosing PPF to save tax means you are locking-in your money for a period for 15 years, though partial withdrawals are allowed after the sixth year. Sure, you can keep the PPF account active by paying as little as Rs 500 in a year, but you wouldn’t achieve your financial goal of planning for retirement.

Avoid Financial Troubles in March

If you try to be adventurous and commit to save more, beware of its consequences. You could face temporary liquidity issues and if you fail to meet the necessary investment requirement, the company may deduct taxes for the entire fiscal. Now, your actual investment proofs, which employees submit during the December-February period, need not strictly adhere to figures and taxsaver avenues mentioned in your proposed declaration.

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