Tax saving plays a significant role in every working individual’s life. It gives you an ample amount of time to plan your taxes before the fiscal year ends. All in all, it helps you to begin the new financial year on the right foot as well as reduce your tax liability.
While keeping track of your taxes is essential, let’s understand the right way to do so:
- Plan a budget
The most crucial step is to plan a budget asit is necessary to account your expenses and outflows. If you do not have a budget, start with a monthly savings target. For instance, keep at least 20-30% of your monthly salary aside to improve financial discipline. A disciplined savings habit will allow you to reach your financial goals faster. Also, the money saved each month can act as a safety net in times of need.
- Start your tax planning early
Many of you might make the mistake of filing your taxes only when it’s too late. However, you should avoid last-minute hassles and begin your tax planning as early as possible. Starting your tax planning early in the year will ensure that the process goes smoothly and without any errors or mistakes. Moreover, it is easier to plan and minimize your tax outflow when you begin early.
- Max out the tax-saving investments
Many tax-saving investmentsare availableunder Section 80C of the Income Tax Act, 1961. Tax-saving investments u/S 80C, such as tax saver mutual fund, tax saver fixed deposits, etc., allow you to claim a deduction of up to Rs.1.5 lac on your taxable income. Utilizing these exempt investments can help you reduce your tax liability significantly.
- Researchexempt investments and expenses
Section 80C deductions are popular among most taxpayers. While they help reduceyour tax liability significantly, do not overlook the importance of other exempt investments and expenditures you make. If you want to claim these additional deductions, one can look at other instruments mentioned under Section 80, such as National Pension System (NPS) in Section 80CCD, payments made towards health insurance premium(s) in Section 80D, etc.You can save up to Rs. 50,000 with your NPS investments and up to Rs. 1 lac (subject to certain requirements) towards health insurance premium payments over and above the Rs. 1.5 lac saved under Section 80C.
Also, interest paid on home loanup to Rs. 2 lac is also a tax-free expense under the provisions of Section 24(b). House Rent Allowance (HRA) too is another exemption you can claim if you live in a rented accommodation.
- Calculate your tax liability
It is crucial to calculateyour taxable income as well as tax liability each year with a rise in income or a change in norms. For starters, taxable income is the amount on which you would be liable to pay tax. Itis calculated after deducting investments as well as other exemptions from your gross annual salary. Broadly, the total gross income is the summation of income received from the following:
- Capital gains
- Other income sources
- Profit and gains of business/profession
- Consult a professional
Tax planning is a serious affair so it is essential to involve a professional to guide you through the process. An expert’s financial advice will ensure that your tax planning is glitch-free and gets executed smoothly.
In a nutshell, tax planning involves choosing the right investments to reduce your tax liability as well as creating wealth over the long term. With this handy checklist, you can easily start saving your taxes and complete your tax filing in time before it is too late. Happy investing!