This Trick Can Help You Save Lakhs! Read More!
When it comes to making a living, it can be challenging. But saving money on taxes? That can be even more difficult. The trick is to work hard and bright by taking advantage of tax deductions and other strategies. Tax planning is one way to reduce the tax you pay, increase your income, and save for retirement.
The tax act provides deductions for investments and savings, as well as other expenditures incurred by taxpayers during a year. In this article, we will discuss what is tax planning and some ways to save taxes.
What is tax planning?
Tax planning allows you to maximize the effect of tax exemptions, rebates, deductions, and benefits available legally. It involves making commercial and financial decisions that would enable you to reduce your tax liability by investing in tax-saving instruments under various provisions of the Income Tax Act of 1962.
Tax planning can be done either by individuals or businesses. Both are required to keep track of their finances from the beginning of the fiscal year so that they don’t end up overpaying taxes at the end due to ignorance or negligence. Tax planning for every individual depends on subjective factors that include age, income, financial goals & risk appetite.
What are the benefits of tax planning?
Tax planning reduces your tax liability by assisting you in investing your money wisely and legally. It helps reduce the amount of litigation that may occur over time and conforms to the provisions under taxation laws. A significant benefit of good tax planning is that it allows you to direct your returns toward investments. These investments can be directed toward building up your wealth, creating jobs in the country, and contributing to the economic stability of India.
What kinds of tax planning are there?
There are essentially four different types of tax planning since it entails investing in the appropriate assets at the appropriate time to meet your short, medium, and long-term financial objectives.
1. Short-range tax planning:
Short-range tax planning involves creating and carrying out tax payments at the end of the year. This type of tax planning can save you money but requires no long-term commitments.
2. Long-range tax planning:
Planning for long-range taxes begins at the start of the fiscal year. As with short-term tax planning, it might not always offer immediate benefits. But, as the name implies, it may pay off in the long run.
3. Permissive Tax Planning:
This includes planning your investments under various provisions of the Income Tax laws. Numerous legal provisions offer exemptions, deductions, rewards, and contributions. For instance, the Income Tax Act of 1961’s Section 80C provides several tax-saving options.
4. Objective tax planning:
Objective tax planning refers to investing with a specific goal in mind. It entails the selection of investment instruments and the creation of a suitable portfolio, replacing assets, or diversifying income based on your residential status, if necessary.
How can taxes be reduced?
Taxpayers have many options to reduce their tax obligations. One is to use Section 80C, the most widely used method of tax avoidance. It includes deposits in the Public Provident Fund, 5-year bank deposits, national savings certificates, and investments in ELSS programs. Another way to reduce taxes is by creating a financial plan and sticking to it when your income changes. It’s also helpful to make tax saving investments before the beginning of the year instead of making rash investment decisions at the last minute. Another strategy is knowing all exclusions and deductions that are available to you.
Options for reducing taxes under Section 80C
One of the most often used parts of the Income Tax Act of 1961 is Section 80C. Investing in an equity-linked savings scheme, or ELSS as it is more popularly known is one of the best ways to reduce taxes under Section 80C. Mutual funds that offer tax planning provide the possibility of both capital appreciation and tax saving. In addition to ELSS funds, you can choose to invest in government programs, including tax-saving FDs, public provident funds, and national savings certificates. Investments made cumulatively under these securities may be eligible for deductions of up to Rs1.5 lakh.
Options for reducing taxes under Section 80D
Taxpayers may claim deductions under this provision for the cost of their health insurance premiums. The following sums are eligible for deductions under Section 80D:
- Get a maximum discount of Rs25,000 on the health insurance premium you pay for yourself, your kids, or your spouse.
- If your health insurance plan also covers your parents, you can receive up to Rs50,000.
- A maximum deduction of Rs75,000 is permitted if either of your parents falls under the senior citizen category.
Options for reducing taxes under Section 80
Tax deductions are available under Section 80E for interest paid on student loan debt. The eight-year period beginning on the payback date is when these deductions may be made. The deductible amount has no upper limit; therefore, a person can deduct 100% of the interest paid from his taxable income.
HRA Exemption claim
Taxpayers may receive a deduction under the HRA for the cost of their lodging expenses. The taxpayer is required to submit the landlord’s rent receipts. The deduction is only for the smaller of the following amounts:
- Actual HRA received;
- 50% of basic salary plus DA for taxpayers in major cities; and 40% of (basic salary plus DA) for taxpayers in non-major cities; or
- Rent paid less than 10% of base pay plus DA.
Conclusion –
Tax planning is a smart way to save on taxes and stay within the law. Income tax planning, if performed within the framework of the law, can be an effective way to reduce your tax bill. However, you should avoid shady techniques to save taxes. As an Indian citizen; it is your job and responsibility to comprehend what is tax planning and how to use it wisely. Based on your tax bracket, personal choices, and social obligations, you can choose from distinct mutual funds that offer you tax saving opportunities.
