As the financial year is drawing to a close, you must be getting emails from your finance team to submit tax planning documents. This might seem confusing for many working professionals. And people who are new to this will simply be having a hard time figuring out what they should do. As a taxpayer, you too would want to save as much of your money as possible. Hence, you need proper tax planning to retain the most.
Tax planning can help you save your hard-earned money. It allows you to maximise your tax returns by minimising your tax liability. It takes advantage of the various tax exemptions proposed by the government to help you save taxes. Proper tax planning helps you to minimise your tax liability. So basically, tax planning helps you analyze your financial situation and optimise it accordingly to save money. Its aim is to ensure that you benefit from it as much as possible. Here are a few tips that you can follow to make tax planning a smooth experience.
Know Your Taxable Income
Before you start on your tax planning, the first thing that you need to know is your taxable income. Your tax planning will not be accurate if you do not know this. You can find out your taxable income by finding out your salary (not your cost to company), income from properties, profits from business, personal capital gains or income from other sources. Once you have figured out everything, this income will then be subject to loss adjustment and only then will you get to know your gross total income.
Under the IT Act, Section 80C allows a maximum combined deduction up to Rs. 1,50,000 of your total income. With proper tax planning, you can claim all of this for yourself by investing in the tax instruments mentioned. You technically have a lot of instruments to choose from, but you will have to see which ones suit you the best. A good combination of multiple instruments will help you take full benefit of this scheme. So, you will be saving money as well as minimising the amount of tax that you need to pay.
For example, House Rent Allowance (HRA) can be deducted from your total income. It is based on the lowest amount of three provisions namely the amount of HRA you receive from your company, actual rent paid less 10% of your basic salary or 50% of basic salary in metros and 40% in non-metros.
Similarly, if you have a home loan you can claim it for a tax deduction. You can claim it in two parts, one on the interest and the other on the principal amount. Usually, interest paid up to Rs. 2 Lakhs can be claimed for deduction under Section 24 of the IT Act. Furthermore, you can also claim a deduction of the principal amount up to a maximum of Rs. 1.5 lakhs under section 80C.
You can also make contributions to the Employee Provident Fund or invest in mutual funds to avail this deduction. But, from the point of view of investments, it’s always wise to go for a home loan. You will be able to improve your credit score, your tax returns and also invest in real estate at the same time.
Insuring your health is a must. It provides you a much-needed tax benefit under section 80D. Under this section, you are eligible for deductions if you have an incurring expenditure to insure your health or the health of your family. According to this, you are eligible for deduction up to Rs. 25,000 for insurance premiums. This limit is Rs. 30,000 for senior citizens. This limit also includes Rs. 5,000 for preventive health checkups for you, your spouse and your children. If you have dependent parents, a separate limit of Rs. 25,000 (Rs. 30,000 in case your parents are senior citizens) is available for tax deduction purposes including a Rs. 5000 limit for preventive health checkups.
Just like medical insurance, life insurance is another must have. More so, because your life insurance premium is eligible for a tax deduction under section 80C. You can buy life insurance for your financial dependents as well in order to take that into account for a deduction. Buy a health or term insurance here if you haven’t bought it already.
Choosing The Right Investment
It’s important that you make the right choices while tax planning. Depending on how much money you can invest, you can opt for a lot of different combinations to get the maximum tax relief. It’s always a good idea to invest in home loans and life insurance because it saves tax money and also provides you personal benefits apart from saving money. There’s still some time left, so start working on your tax planning today instead of leaving it for the last minute.