Tax optimization plays an important role in financial planning. There are a number of changes to the tax system in the 2023/24 financial year, so it is essential for both individuals and businesses to plan their taxes strategically. Learn effective strategies to improve your after-tax returns while remaining compliant.
Let’s take a look at some practical tips and strategies to help you save on taxes. These are easy to understand and can make a big difference in your financial planning, whether you’re a beginner or have been learning about finance for a while.
Tax Harvesting: Capital Gains Strategy
Tax Harvesting is a smart strategy for managing and minimizing capital gains taxes. This is the process by which investors sell underperforming or loss-making investments in order to offset gains from less profitable investments. This technique is particularly useful when optimizing tax liability. For example, let’s say someone has a diversified portfolio that includes stocks from different sectors. During the financial year, one of his technology stocks did very well, with a capital gain of ₹50,000 and ₹0,000. However, another stock in the auto sector did not perform as well and the individual suffered a loss of ₹20,000. Strategically selling loss-making auto stocks can effectively offset gains in technology stocks. This reduces the taxable net capital gain to ₹30,000.
Understanding timing and market movements is important when collecting taxes. In addition to tax considerations, your general investment strategy and long-term financial goals should also influence your decision to sell.
Splitting capital gains over financial years
This strategy involves planning the sale of stocks or mutual funds to spread capital gains over two fiscal years, thereby reducing the tax burden in each year. Masu. This allows investors to significantly reduce their annual tax burden. This is particularly beneficial for those on the higher end of the tax bracket, as it provides the opportunity to manage taxable income more effectively. However, it is important to note that this requires a thorough understanding of market trends and the potential impact of such sales on your investment portfolio.
Using NPS as part of your company benefits package
This strategy offers employees a valuable opportunity to maximize their savings and minimize their tax outlay. When your employer contributes to your NPS account, it counts as another deduction under section 80CCD(2). This is particularly beneficial as it is more than the standard limit of ₹ 1.5 million allowed under section 80C. This basically means that you can enjoy additional tax-saving benefits without using up the 80C limit.
Grandfather clauses and benefits in mutual funds
From April 1, 2018, Section 112A will apply to the taxation of long-term gains on sale of listed stocks through stock exchanges. This tax is applied to sales if he paid STT at the time of sale. This includes shares received through inheritance, gifts, or ESOPs. A gain or loss is considered long-term if the stock is held for more than one year. Anything less than that is for a short period of time. For inherited or gifted shares, counting begins when the original owner receives the shares. The cost will be the lower of the amount you paid or the highest market price and sales price as of January 31, 2018. This rule also applies to shares inherited or transferred based on the acquisition cost to the original owner. If the long term gain in a year exceeds Rs. 2000. 1,00,000, after deducting all long term losses, this gain is taxed at 10%.
Choosing an Arbitrage Fund for Short Term Needs
For short term capital needs (6-12 months), arbitrage funds offer higher tax savings compared to liquid assets. While gains from liquid assets are taxed as per personal tax if the holding period is less than 3 years, arbitrage funds have the advantage of being taxed similar to equity funds, resulting in reduced tax liability on short term gains.
In summary, optimizing your tax in India requires a comprehensive understanding of the available tax saving opportunities and strategic investment planning. Regular updates on tax laws and consultation with a tax professional are essential to maximize your after-tax returns.