Newsletter 61: Advanced Tax Planning for Higher Income Brackets
Nitin Rajput
AGM - Head of Learning And Development | Airpay Academy | Ex NPCI | Ex General Mills
Ajay’s Tax Challenge: Moving Up the Brackets
Ajay sat at his desk, sipping his evening chai, reviewing his annual income statement. His financial planning and investments were paying off—his earnings had significantly increased due to a combination of salary hikes, investment gains, and side ventures. But with growth came a new challenge: higher taxes.
For years, Ajay had comfortably optimized his tax liabilities within the lower brackets. Now, he found himself entering a higher tax bracket, where tax efficiency became more crucial than ever. Determined not to let rising taxes erode his hard-earned wealth, Ajay decided to explore advanced tax planning strategies.
Understanding the Impact of Higher Tax Brackets
In India, income tax is structured into progressive slabs, meaning the more you earn, the higher your tax rate. With his new income level, Ajay was now taxed at 30%, in addition to surcharges and cess, bringing his effective tax rate even higher.
His key realization: Earning more doesn’t mean keeping more—unless you plan efficiently.
Tax-Efficient Investment Strategies
Ajay explored several investment options to minimize his taxable income while ensuring his wealth continued to grow:
1. Maximizing Section 80C Benefits
Ajay ensured he was utilizing the ?1.5 lakh deduction limit under Section 80C by investing in:
? Equity-Linked Savings Schemes (ELSS): A tax-saving mutual fund with a 3-year lock-in and strong return potential.
? Public Provident Fund (PPF): Providing a risk-free, tax-free return, ensuring long-term wealth preservation.
? Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF): Maximizing employer-matched contributions.
2. Leveraging the National Pension System (NPS) for Additional Tax Benefits
Under Section 80CCD(1B), Ajay invested an extra ?50,000 in NPS, reducing his taxable income while securing retirement benefits.
3. Claiming HRA and Home Loan Deductions
Since Ajay was renting an apartment, he maximized his House Rent Allowance (HRA) deductions. He also considered buying property to claim benefits under Section 80EE and 24(b) for home loan interest deductions.
Exploring HUF and Other Legal Tax Structures
Ajay researched forming a Hindu Undivided Family (HUF), a legal entity in India that allows families to pool assets and reduce individual tax liabilities. Key benefits included:
? Separate tax exemptions: An HUF has its own ?2.5 lakh exemption before income tax kicks in.
? Asset segregation: investments held under an HUF could generate income that is taxed separately.
Ajay also consulted a chartered accountant to explore:
Key Lessons for High Earners
Ajay’s key takeaways for anyone entering a higher tax bracket:
?? Start planning early—waiting until the last minute means missing out on key deductions. ?? Diversify tax-saving investments—don’t just rely on 80C; explore NPS, HUF, and deductions under 80D (health insurance).
?? Consult a tax professional—complex tax structures require expert advice to avoid compliance issues.
What’s Next?
After optimizing his tax strategy, Ajay was looking to diversify his real estate exposure without the hassles of owning physical property. In the next newsletter, Ajay explores Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs), learning how to invest in real estate with liquidity and lower capital requirements.
Stay tuned!