Five ways to plan your taxes ahead of Budget 2018Here are five things to watch out for in the upcoming Budget on February 1st concerning your investments. We also tell you what actions you can take to benefit from them.

1) Personal Tax Slabs

Tax-reform and tax reduction have acquired a global note with Donald Trump making it his top agenda for the current year. The Indian government has made a move in this direction by cutting the tax rate for the lowest slab (Rs 2.5-5 lakh) from 10% to 5%. However, the government strategy here is more nuanced. Although it has tried to cut taxes in the lowest slabs, it has increased them for the higher slabs by introducing surcharges for incomes above Rs 50 lakh (10%) and Rs 1 crore (15%). This trend is likely to continue with existing tax slabs being widened for the benefit of small taxpayers. Eg: Increasing the 5% slab from Rs 5 lakh to Rs 8 lakh.

Steps to take: Enjoy the benefits. You can also shift income from this year to the next, for instance, by selling mutual funds in the next year. This may result in you facing a lower rate of tax. You will still have two months after the Budget (February and March 2017) to decide whether to do this.

2) Limit under Sec 80C

The 80C exemption limit has been frozen at Rs 1.5 lakh since 2014. With inflation of 4-6% over this time period, the value of Rs 1.5 lakh has been eroded, making an increase long overdue. Moneycontrol recently reported that this was specifically requested in a recent pre-budget meeting by top executives of banks and financial firms. An increase would fit in well with the government’s push to move household savings from real estate and gold to financial assets. Experts predict an increase in the limit to 2 lakh.

Steps to take: Try and free up some additional savings for investment in the next year. The 80C limit cannot be carried forward to subsequent or previous years.

3) Capital Gains Tax on Equities

This one has been long overdue. The stellar gains in the stock market and equity mutual funds since 2014 have made this a lucrative tax opportunity for the government. The Prime Minister hinted at this as far back as December 2016 when he said that those who make gains from financial markets should contribute their fair share towards nation building through taxes. The current capital gains tax on equities is just 15% for holding periods of less than a year and nil for longer periods. There are various possibilities here from an outright increase in the long-term capital gains tax to an increase in the holding period to qualify for it, from the current one year.

Steps to take: If you have large unrealised gains in stocks or equity mutual funds, you can book some profits and immediately reinvest the proceeds in the markets. If your holding period has crossed one year, this will allow you to realize the gains in this year and hence protect yourself from a tax increase in the budget which will apply in the next year.

4) Changes in the NPS

The Government’s flagship retirement scheme – the National Pension Scheme (NPS) – is not currently accorded the same tax benefits as its competitors – the EPF (Employees’ Provident Fund) and PPF (Public Provident Fund). The accumulated NPS corpus was not tax-free at maturity whilst 100% of the EPF and PPF balances have been tax-free on their maturity. This was changed in Budget 2016 which made 40% of the accumulated corpus, tax-free. Nonetheless, a major gap of 60% remains. The pensions regulator, Pension Fund Regulatory Development Authority (PFRDA), is in favour of further equalisation between the different retirement schemes on offer. Watch out for some moves here.

Steps to take: Make sure you use the additional Rs 50,000 deduction for NPS under Section 80CCD(1B) which is over and above the Rs 1.5 lakh under Section 80C. This is a good investment even under the current tax rules. Any move towards increasing the NPS tax exemption on withdrawal will be an added bonus.

5) Reform in the Dividend Distribution Tax

The Dividend Distribution Tax (DDT) of 15% is paid when companies pay out dividends. However, these dividends are paid out of post-tax income, meaning that corporate tax has already been paid on it. The DDT thus introduces a second layer of tax. A third layer is paid by persons receiving more than Rs 10 lakh as dividends when they pay a 10% on such income. There is in effect a triple taxation of dividends in some cases. This has led to a major shift from dividends to other forms of payout such as buybacks in the equity market. Several experts have opined that the government will introduce reforms to end the multiple layers of taxation.

Steps to take: Companies with high dividend yields provide a good stream of income along with capital appreciation. However, you have to look at several other factors such as sales and profitability before picking a stock. Do not get swayed by short-term market moves emanating from any budgetary changes to the DDT.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.