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Tax Optimization Strategies Of Individuals For Better Financial Planning

The NPS is a pension scheme that allows individuals to invest a certain amount on an annual basis before retirement and then at their retirement get their savings as lumpsum and some part as an annuity scheme.

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‘In this world there is nothing certain, but death and taxes’ are the famous words said by Benjamin Franklin. We could not agree more with this quote as we increasingly see individuals not accord due attention to their taxes and its optimisation, despite the fact that what matters at the end of the day is their post-tax returns.

We will in this article try and layout a few aspects and avenues that individuals should take care of which would help them in optimising their tax outgo. 

Existing Vs New Tax Regime

As one would be aware, the government in the Finance Act 2020 announced that individuals will have a choice of choosing between two options while filing their taxes viz,

1) The existing regime with the relevant tax deduction provisions available (under section 80C – ELSS, PPF, EPF, Sukanya Samriddhi Yojana, etc), National Pension Scheme, HRA benefits etc; and

2) A new regime where the tax slabs are lower but majority of the deductions are not available.

The above is the first step towards optimising your taxes as one should opt for either of the above schemes depending on the tax outgo, the requirement of liquidity and risk as a lot of these deductions warrant investments into avenues that blocks the money for a considerable time frame.

As a thumb rule, in case of a person earning above 15 lakhs of income, if tax deductions are over and above INR 250,000 (via various deductions like Section 80C, NPS,HRA/LTA etc), then opting for the old scheme might be better.

Hence, considering the fact that the old regime offers deductions and also inculcates a healthy savings practice, we are inclined towards the existing regime.

Needless to say that if there is a liquidity squeeze for the individual and/or their tax liability in the new regime is lower due to lower deductions, then the new scheme should be opted.

Also, it needs to be kept in mind that if a non-salaried person opts out of the scheme, the person cannot opt-in again for the new tax regime in the future (except when the person cease to have income from Business or profession)

Deductions against Section 80C - Small Savings Schemes 

Sukanya Samriddhi Scheme 

Individuals with up to 2 daughters under the age of 10 years, can subscribe to this scheme and the amount is deductible under Section 80C from their taxable income (subject to the maximum deductible limit of 1.5 lacs). This scheme, apart from the deduction, offers a higher tax-free interest rate of 7.6% against PPF which is 7.1% and a much better bet than various other fixed income avenues.

Public Provident Fund(‘PPF’)

PPF is a savings cum tax savings investment, wherein, individuals can accumulate amount for a period of 15 years (which can be extended in the blocks of 5 years) earning an interest of 7.1% per annum. The amount so invested annually is exempt from tax up to an extent of 1.5 Lacs every year under section 80C of the Income-tax Act. PPF is again a very healthy tax-free option for the investor and allows him to accumulate long term wealth.

National Pension Scheme

The NPS is a pension scheme that allows individuals to invest a certain amount on an annual basis before retirement and then at their retirement get their savings as lumpsum and some part as an annuity scheme. They can also choose to take out a maximum of 60% as lump sum at their retirement, however a minimum of 40% would need to be taken as annuity (i.e. Periodic receipts post retirement).

Currently, the big advantage of this scheme is that it allows an additional deduction of upto INR 50,000 from taxable income under section 80CCD, which effectively helps reduce the tax liability. This is an immediate and significant benefit to begin with for an investor (i.e. INR 15,000, excluding cess/surcharge, in the highest tax bracket)

Tax Loss Harvesting

Tax Loss harvesting (‘TLH’) is a concept which is prevalent in the western countries and is gradually catching up in India gradually. Under TLH, if an investor has some investments (especially equities) which are generating negative returns by a large percentage, the investor can sell and buy the securities again at same price to accumulate capital losses.

Let’s say an investor holds 100 shares of company ‘A’ which were bought at a price of INR 100 on January 1, 2020 and later the said share is trading at INR 75 on March 24, 2020. In such a case, basic principles for investments dictate that we should do nothing and wait for market to recover. However, one can approach this situation with the concept of TLH. On 24th March, the investor can sell 100 shares at INR 75 and book a loss of INR 25 per share. Subsequently, he can buy the same share back the next day on 25thMarch 2020 (Here, one needs to be bear in mind that the price of the share could be different due to the one-day gap between buying and selling, we wouldn’t recommend buying and selling on the same day due to tax considerations)

Thereafter, the new cost of investment would be INR 75 and short-term capital loss as INR 25. Now the investor can either carry forward this loss for 8 years or if in the same year, he has a Capital gain, he can set it off against that. Especially, in case of short-term gain from debt mutual funds, wherein, gains are taxed at slab rate (i.e an investor in the highest tax slab will be able to save 30% on his Rs. 25 loss).Even Short-term Capital gains from unlisted equity / real estate would be a good set off against this as their Short term Capital gains rates are high.

Although the investor would have to pay tax whenever he/she sells the share at a lower cost of INR 75.Hence, this strategy is advisable only if the individual has short term capital gains which are taxed at a higher slab than the capital gains on equity, that the investor would have to eventually pay.

It is to be noted that, as per the Income-tax Act, short term capital losses can be set off against both short- and long-term capital gains. While, long term capital losses can only be set off against long term capital losses.


There are other options like forming a Hindu Undivided Family (HUF) especially if there are any ancestral assets being bequeathed to the person. The HUF helps him to create a separate legal entity on which the tax slabs start afresh and also relevant deductions can be applied. However, this has to be carefully planned with expert guidance due to the complexities involved and also the clubbing provisions under Income-tax Act play.

To summaries, we have tried to give a brief on possible tax optimisation strategies, needless to say it is imperative that each person unfailing consults his/her tax advisor to adopt strategies that is best suited to them and helps them optimise their tax outgo while keeping other factors like liquidity, risk etc in mind.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Vivek Banka

Founder, GoalTeller

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