Last-minute tax planning can hurt

Getting into such complex situations every year end isn't the best idea as it can lead to unnecessary queries from the I-T department

A friend called recently with an interesting question. This financial year-end had seen a spate of holidays with three bank holidays preceding the last day of the financial year, a Saturday. Consequently, banks were open for business till late in the day to facilitate year-end transactions, including most important payments to the government. 

The friend, as usual, had forgotten to make investments in his equity- linked savings scheme (ELSS) till the last day. To his credit, he had made sure that the money was transferred electronically to the mutual fund house before he applied forthe ELSS units. His bank account had been debited for the amount instantly on month end. But when he got the statement from his mutual fund house, he realised that the units had been allotted only on April 3, 2018, as the electronic application form had been transmitted just after the cut- off time on March 31, 2018. He was now worried whether he would be able to claim the tax deduction benefit under Section 80C. 

I asked him not to worry. The wordings of Section 80C were very clear. As long as the sum had been ‘paid or deposited in the previous year’, he would be eligible for the tax relief. It did not matter that the units had been allotted only in April 2018 as long as the amount itself had been paid or deposited by March 31, 2018. The Section does not require that the units themselves be allotted by March 31, 2018.  The situation would have been the same for any other instrument as well. 

Harsh Roongta

However, the friend had another query. In a prior year, he had again done one of his last-minute investments by handing over a cheque for life insurance premium on the last day of the year. The life insurer had issued a receipt dated March 31 even though the actual payment was debited to his bank account only in April. His question was ‘does handing over a cheque qualify as payment?’ Since this is a common practice in the insurance industry, I said that it should tantamount to payment as he had handed over the cheque to the insurer in March. The date of encashment of the cheque by the insurance company was immaterial. 

After all, if that argument is accepted, even if the insurer were given the cheque 15 days before and it had delayed encashment, the customer would be denied benefit due to the insurer’s fault. That obviously cannot be the intention of the Income Tax Act. Hence if the cheque has been handed over unconditionally, it should amount to ‘payment’, and you should be entitled to the tax benefit. 

But getting into such complex situations every year end isn’t the best idea. It can lead to unnecessary queries from the I-T department and make life difficult for the taxpayer. I told my friend that this error should not be repeated in the future. And starting a monthly systematic plan in an ELSS from April itself is the ideal solution to ensure such situations don't arise.

The writer is a Sebi-registered investment advisor