1. You can still make tax saving investments / allocations
Just because your HR department does not accept investment proofs or since the last advance tax instalment is paid, it does not mean you cannot invest to save tax. As an individual, if your Section 80C is not fully utilized or if there is still space in Section 80D and you have funds with you, you can still make the investments.
Of course, your HR department would not accept the proofs but you can claim these tax rebates while you file actual tax returns by 31st July 2021 for the financial year 2020-21. In case your HR and Payroll department has already deducted more tax than you are required to pay, you can claim the difference as tax refund.
2. It is still not too late for capital gains tax farming
Tax farming is converting notional losses into actual losses so as to claim tax shields. Here is how it works. Say you have short-term capital gains from equities of Rs225,000 in the current year. You have already paid advance tax on this gain. Now the Sensex has fallen and 3 of your stock holdings are currently having a notional loss of Rs195,000. You can do tax farming!
Just book the loss on these positions of Rs195,000. This short-term loss of Rs195,000 can be set off against your short-term gains of Rs225,000. Hence, you need to pay 15% short-term capital gains tax only on Rs30,000 instead of Rs225,000. That is a lot of tax you will save. If you have paid the advance tax, you can just claim the additional tax paid as refund when you file you returns.
3. Do some smart indexation of debt fund investments
Debt funds are classified as non-equity investments. They become long-term assets only when held for over 36 months. Suppose, you intend to buy debt funds worth Rs500,000 in the first week of April 2021. Instead, you can buy in March itself. What is the big advantage? You get the benefit of dual indexation!
If you invest in April, the index value of 2021-22 will be considered for calculating capital gains when you exit in April 2024. However, if you invest a few days earlier in March, you get the index value of 2020-21. That means; you get a higher indexed value of acquisition and therefore pay lower tax on debt fund gains.
Don’t lose sleep because your HR department has already deducted tax or if you already paid advance taxes. You can still make tax-saving investments and claim a tax refund.
Key tax changes kicking in from FY-2022
As March is half-way through, let us also look at some of the major changes that will kick in from April 2021 onwards. You better be prepared for it.
- The bad news is that interest earned on provident fund will be taxable from April 2021 onwards. The good news is that only the interest earned on annual contributions of more than Rs250,000 will be taxed. In case you are sitting with your HR for review or looking to shift jobs, structure your package accordingly. Remember, your VPF contributions will not pay you tax-free interest like before.
- Provision for penal TDS for not furnishing PAN number already exists in cases like rental payments. Effective April 2021, there will be two parallel rates of TDS. The TDS rate will be lower if you are filing your tax returns but higher if you are not filing returns. It makes more sense to start filing your returns from next year on time as the government is likely to come down heavy on non-filers.
- There is a big change from financial year 2021-22 in that most tax returns will now come pre-filled. Not just your salary, but even your interest income, dividend income and capital gains will come pre-filled. It is surely going to save you a lot of trouble, but it also means your flows will be tracked closely.
- If you are above 75 years with only pension and interest income, you will not be required to file tax returns. Of course, in case you have any other source of income, then you must file returns. However, nowadays the Income Tax department deducts TDS on pension so filing is mandatory for a refund. The impact may be on smaller pensions.
Some interesting changes are kicking into the tax rules from April and should hopefully make life easier for you.