India has one of the highest tax liabilities in the world. This means that a large amount of your income is taxed. What is tax planning meaning? To plan your taxes mean to analyse your financial situation and build a strategy from a tax perspective towards the objectives of tax planning. However, there are ways to reduce your taxes if you plan efficiently. The Income Tax Act recognises various tax-saving instruments and avenues which can help reduce your tax outgo.
So, why not plan to ensure your hard-earned money is not taxed, especially when there are ways to reduce it? Tax planning and management can be done easily if you know how. Here are some methods of tax planning that can help you do it:
Basic steps to plan taxes
1. Understand your gross annual income
The first step includes understanding your total income from all sources. If you are employed, it would be your annual salary. If you are an entrepreneur, your business or professional income would be the major source of your income. Also include other sources like income from house property, capital gains, income from other sources, etc.
2. Reduce your taxable income
If you are an employee, you can restructure your salary to optimise tax-saving through the different types of tax planning. There are some components in your salary structure which can be used to lower your taxable income. They are:
a. House Rent Allowance (HRA)
b. Leave Travel Allowance (LTA)
c. Medical reimbursement
d. Meal allowance, etc.
Claiming these allowances will result in you paying lesser tax.
3. Use tax-saving investments
There are various tax-saving investments under Section 80C of the Income Tax Act. Investing in these funds can get you tax exemption up to Rs 1.5 lakh. Some of the funds are:
• Public Provident Fund (PPF)
• Life insurance
• Equity-linked savings scheme (ELSS)
• Fixed deposits
• National Savings Certificate (NSC)
Also, you get an additional exemption of Rs 50,000 if you:
• Invest in National Pension Scheme (NPS)
• Have a home loan. Your tax is exempted if you are repaying the principal and interest components of the loan.
Furthermore, your saving account interest can be claimed as an exemption up to Rs 10,000. So, explore all possible investment options and reduce your taxable income.
4. Take help of family members to save tax
If you are living in a property owned by your parents, give them rent and claim the HRA. If you don’t have an HRA component, you can still claim exemption on the rent paid under Section 80GG of the Income Tax Act.
You can invest in a tax-free instrument in your spouse’s name. This can earn you tax-free income.
Pay health insurance premiums for your family and parents. If all your family members are below the age of 60, you can earn a tax exemption of Rs 50,000. If your family is below is 60 but your parents are above that age, the maximum tax exemption is Rs 55,000. If all of them are above 60, the tax exemption ceiling is Rs 60,000.
5. Keep tax proofs handy for verification
The taxman can ask for last 7 years’ documents.
6. File your taxes before deadline
Doing so will help you get a quick refund if your tax liability is below the tax you have already paid.
The smaller details you shouldn’t forget
1. School tuition fees of first two children are eligible for tax deduction under Section 80C
2. Mandatory contribution towards your Employees Provident Fund is also a part of Section 80C investments
3. Plan your taxes with reference to your goals and tax bracket. If you are in a higher tax bracket, choose investments which will give you maximum tax relief. For instance, if you are in the 30% tax bracket, investing in equity can help you save tax if you plan to sell them within 12 months. That’s because there’s a flat 15% short-term capital gains (STCG) tax on selling your equity within 12 months. Thus, this can be a better idea because you end up getting taxed 15% and not 30%.
Smart tips for tax-saving investments
1. Opt for a monthly investment like an SIP in ELSS or a monthly contribution towards PPF
2. Avoid fixed multi-year or long-term commitments if your income is not stable
3. Complete your KYC with a fixed e-mail ID and phone number for online transactions
4. E-verify your tax online using your Aadhar number and bank account.
To sum up
Taxes can eat into your annual income. So, take these steps to ensure you don’t pay more than what’s required. There is a need of tax planning and an effective plan will ensure you invest to maximise your wealth and save taxes. This is where IndiaNivesh’s services can be critical.
At IndiaNivesh, you can get the following advantages:
• Expertise in tax-planning and investment ideas
• Scientific and well-researched process of product selection
• Suitability of products that match your risk and investment profile so that they can fulfil your goals
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Know the Difference between Tax Deduction and Exemption
Every industry comes with its technicalities, and the income tax institution also has its own set of jargon. Some expressions may have more than one implication considering its usage, while some phrases may have analogous significances but diverse applications. For instance, the difference between exemption and deduction is not clear to all, even though both are useful in minimising the amount of taxable income. However, the difference between exemption and deduction in income tax are applied to different fields of your taxes.If you are earning an income, then sooner or later, you are bound to hear the words ‘Income tax’. However, there is a difference between exemption and deduction. The quantum of tax you may have to pay every fiscal year is usually based on how much you earn, your tax-filing status and so on. Luckily, the Income Tax Act has offered various provisions that allow you to reduce the amount you pay as tax. But before you take advantage of your tax benefits, you need to understand the jargons thoroughly.For example, take the two terms: Tax deduction and tax exemption. A lot of people can be confused between exemption vs deduction and may use the two words interchangeably. However, the differences between exemption and deduction are plenty. So, let’s find out the main differences between tax deduction vs tax exemption.Tax deductionTax deduction refers to the amount of money that is reduced from your total taxable income. The final tax payable is calculated depending on the balance ‘taxable income’. Tax deductions aim to promote the culture of savings and investments among the general public.However, it is good to know that tax deduction is only allowed on specific investments or expenses incurred by the taxpayer. This includes medical fees, transportation charges, donations made to charities, investments made in specific avenues such as Equity Linked Saving Scheme funds (ELSS), Public Provident Fund (PPF) and National Pension Scheme (NPS).The Income Tax Act sections between 80C and 80U deal with all the deductions available to taxpayers.Tax ExemptionIn the world of taxation, the word ‘exemption’ means exclusion. So, if a particular income is exempt from tax, it will not be included in the total revenue for tax purposes. This reduces the total taxable income of a taxpayer. All exemptions are dealt with under Section 10 of the Income Tax Act.While certain incomes such as agricultural income are completely exempt from taxation, there are other incomes that are partially exempted from tax. This means only the portion of income that exceeds the exemption is subject to tax. This includes: a) House Rent Allowance (HRA)b) Leave Travel Allowance (LTA)c) Entertainment Allowanced) Special allowances to meet personal expensese) Long-term capital gains on equity fundsTax deduction vs tax exemptionTax exemption applies to all taxpayers in the country. For instance, the amount paid to a salaried employee as HRA is not taxable. However, tax deduction applies only to those who qualify for the specific criteria. For instance, Section 80D of the Income Tax Act can be used to claim deductions on premiums paid for medical insurance policies. Even though Income Tax is a mandatory responsibility to be paid by every citizen, based on his or her paying capacity, age, and gender, taxpayers can obtain relief through the various provisions to reduce their overall tax financial obligation. Understanding the difference between exemption and deduction in income tax can help in making smarter decisions before the annual tax planning process commences. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Why ELSS Funds Is One Of The Best Tax Savers Under 80C
Every year, around this time, everyone seeks to make investments to save tax at the end of the financial year. Some of the popular tax-saving investments include Public Provident Fund (PPF), life insurance policies, National Pension Scheme (NPS) and fixed deposits. But one of the most effective tax-saving instruments under Section 80C of the Income Tax Act is the equity-linked savings scheme or ELSS. It's a great investment-cum-tax saving option for young and old alike.What is ELSS?ELSS is a mutual fund scheme that invests its corpus in the equity markets and aims to generate market-linked returns. You can claim an income deduction of up to Rs 1.5 lakh under Section 80C – which means you can reduce Rs 1.5 lakh from your taxable income. You can save up to Rs 46,800 in taxes if you are in the highest tax bracket by putting money in ELSS.ELSS has a lock-in period of three years from the date you begin your investment. After this period, you can withdraw the funds. Equity markets tend to deliver better returns over the longer term and hence a three-year lock-in works in favour of the investors.Why is ELSS one of the best tax-saving options?Many experts believe that ELSS is better than all other 80C investments due to the following reasons1. Higher returns: The best ELSS funds deliver 15-20% annualised returns over time-frames of five years and longer. This is higher than all other options. Of course, equity-linked investments carry greater risk, but over the longer-term it is a good option.2. Shorter lock-in: Most 80C investments have lock-ins of five or more years. ELSS comes with a lock-in of just three years3. Tax-efficient returns: Though long-term capital gains were introduced on mutual fund returns from last year, ELSS still provides among the most tax-efficient returns, barring PPF and NPS, whose returns are tax-free. 4. Flexibility and choice: It’s easy to buy and sell ELSS units. You can invest in a lump sum or through an SIP. What’s more, you can choose from a wide range of schemes that matches your needs.But how do you choose an ELSS?It's not the easiest job selecting the ELSS you want to invest in. Which is why our experts have picked a set of funds that you can consider. ELSS Performance as on 10-Dec-2018 Lumpsum or SIP in an ELSS?Experts recommend that one of the best ways to invest in the equity markets is through a systematic investment plan, because it reduces the risk of volatility. However, when it comes to ELSS, do remember that each of your SIP investments will mature after three years from the date of that investment. For example, let’s say you start a Rs 10,000 monthly SIP on April 1, 2019. Your last SIP instalment for the year would be March 1, 2020. While the lock-in on your first investment will end in April 2022, your last investment will mature only in March 2023. Hence, keep in mind your liquidity and cash flow requirement while making the investment. It is advisable to invest in ELSS in fewer instalments rather than monthly SIPs. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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