If the terrain is very rough, it helps if the vehicle has a 4×4 turbo drive. Similarly, your tax planning can ride over unforeseen rough conditions if you follow these practices while submitting your investment declaration. Here’s how to give your investment declaration the 4×4 advantage and turn the annual ritual into an effective tax planning tool.
I. Who should submit the investment declaration?
- A salaried person who draws a monthly income is required to declare his investment for proper computation of income and deduction of tax.
- A person who wants to opt for the new tax regime. If the tax regime is not declared, the old tax regime will apply by default. The old regime has higher tax rates.
- Taxpayers who want their total taxes to be calculated and paid from his income should declare all sources of income in their investment declaration.
- Employees who have worked in another organization during the year must declare the income and taxes deducted by the previous employer.
II. What needs to be mentioned in the investment declaration?
- Pay structure: An employee needs to align his CTC as per his financial needs. He may opt NPS, food coupons, LTA, car lease and other components that his employer offers.
- Investments: Some investments, like Provident Fund or NPS are already known to the employer. But ELSS, insurance, PPF, NSCs and self-purchased NPS need to be reported.
- Expenses: Amount spent on certain expenses, such as house rent, home loan, medical insurance and donations must be mentioned in the investment declaration.
- Other incomes: Income from other sources, such as interest on deposits and bonds, can be mentioned so that TDS is correctly calculated and paid.
III. When should investment declaration be submitted?
- Employees with flexible pay structures get the option to restructure the CTC in the months of April and May. After May, this option is closed and CTC can’t be restructured.
- Companies also ask for investment declaration at the beginning of the financial year. Though this can be done afterwards as well, it is best to submit it in April-May itself.
- After the declaration is submitted, companies ask for actual proof of investments and expenses in December or January. Full year’s tax is calculated basis actual investments.
- Taxpayers who miss both the deadlines, but managed to do their investments in March will have to claim the tax deductions and exemptions while filing ITR.
IV. Why should taxpayers submit investment declaration?
- It is a statutory compliance. A salaried person drawing a monthly income is obliged to declare the investments to be made during the year for correct deduction of taxes.
- The declaration helps in correctly calculating the tax liability of individual. If company knows about tax deductions, exemptions to be claimed, the TDS will not be high.
- If person declares his income from other sources, employer takes that into account and deducts TDS. This prevents very high tax liability at the end of year or when filing ITR.
- Mapping the actual investment with the declared investment helps a taxpayer avoid the last minute tax-saving investment mistakes.