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.