Why accurate investment declaration is important

In April every year, one tradition remains constant – employees finding their inboxes swamped with requests for investment declarations, marking a period for heightened financial awareness. With the dawn of the fiscal year, there is a pressing need to map out one’s financial and tax strategies for the year. 

Strategic tax management is integral to financial planning, necessitating foresight into tax liabilities and optimizing payments. A significant component related to this is choosing between the ‘old’ and ‘new’ income tax regimes. The old regime of personal taxation presents an array of non-taxable allowances such as house rent allowance (HRA) and leave travel allowance (LTA), deductions encompassing investments under Section 80C and medical insurance under Section 80D of the Income Tax Act, among others. In contrast, the new tax regime offers lower tax slab rates with minimal deductions. While the new tax regime is now the default regime, one must evaluate which is the more beneficial of the two, especially when providing investment declarations at the start of the fiscal year. 

Our calculations show that the choice between the two tax regimes for individuals earning a gross salary of Rs15 lakh could be indifferent if their eligible deductions/ exemptions under old regime is around Rs4 lakh. However, the old regime is advantageous only if the eligible deductions or exemptions exceed Rs4 lakh, else the new regime appears more favorable.

Choosing a regime, particularly the old one requires careful judgment on planned expenses or investments as it provides various deductions towards expenses and investments. This is where investment declaration come into picture. Accurate and timely investment declaration is vital for claiming deductions and benefits under the Act. These declarations hold the power to rightly calculate and deduct taxes by the employer, resulting in the right take-home salary, a crucial aspect of managing cash flow.

Salary structures typically include flexi benefits, which could include specific allowances such as leave travel and meal allowances, etc. If employees foresee utilising such allowances for travel, food etc, the decision to opt specifically for such allowances should be declared at the beginning of the year. Failure to declare upfront may hinder the ability to avail these benefits and deductions later during the year. Also, salary hikes midway through the year present another consideration in choosing the best-suited tax regime. 

Once the tax regime is chosen, switching it at the time of filing the income tax return (ITR), although permitted by the law, could pose practical challenges. Especially, shifting from the new regime to the old one to claim certain deductions such as HRA or LTA could lead to discrepancies between Form 16 (issued by the employer after the year is over) and ITR, potentially triggering ITR processing errors or inquiries from the tax department. Deductions not reflected in Form 16 could pose challenges for subsequent claiming in the ITR, on account of mismatches in the pre-filled returns. An early assessment, therefore, of the preferred tax regime is always a wiser step to take. 

Additionally, striking a good balance between investing for tax deductions, especially under the old regime and investing for financial growth is essential. Many salaried individuals prioritize deductions to lower their tax burden without considering the financial viability of the investment. Balancing cash flow with tax benefits is the key. For instance, one must be aware that the threshold of Rs1.5 lakh under Section 80C is a cumulative one and not per financial instrument described therein.  The year-end is vital for submitting proof of initial investment declarations too. Failure to maintain or provide proof for investments may lead to higher tax deduction at source (TDS) and eventually, a reduced take-home pay in the closing months of the year. 

Navigating the complex landscape of financial planning demands professional expertise, particularly regarding taxation. Consulting a qualified professional ensures that individual financial situations are carefully evaluated, leading to tailored strategies that align with financial requirements and goals. Choosing a tax regime and making an appropriate tax declaration is just one facet of this process, but an important one, nevertheless.

Sandeep Jhunjhunwala is partner, Nangia Andersen LLP. Udit Jain and Sravani Raghuram, manager and associate, respectively, contributed to this column.