All law-abiding citizens of the country have tax obligations. However, not all of us qualify to pay taxes. Those who do, often discuss how to go about it without ending up with no savings. Depending upon your tax slab, your tax amount could burn a hole in your finances. But there are legal ways to save tax, and you can save a lot if you have a tax plan.
This article informs you about tax plan basics and how you can do your income tax planning.
What is Tax Planning?
Just like financial planning where you chart your financial goals and needs, there is income tax planning. A tax plan should guide you on how much you can save in taxes and where you need to invest to do that. You can make use of various legislative measures that offer direct deductions, exemptions, and benefits from taxation.
However, the first step in saving any tax is research. A crucial part of tax planning is researching what options you can deploy to save more.
Your tax plan should help you save as much as you can.
Types of tax planning
There are broadly three types of tax plans:
Purposive tax plan:
This plan involves saving taxes in alignment with a specific financial goal. The most beneficial of the lot, it involves active assessment over options that maximize tax benefits by selecting particular tax-saving instruments and dissipating income, among others.
Permissive tax plan:
In these plans, you save as per what the framework of the Income Tax Act, 1961 allows, without much focus on external funds and income divergence methods. This also is the most common form of tax planning in India.
Long-range and short-range tax plan:
These plans are hatched and made active towards a fiscal year’s beginning and end respectively. However, work done in haste is never good. Tax plans that are short-range or made towards the end of the year aren’t recommended over long-range tax plans.
Objectives of tax planning
- Help you save tax
- Maximizes financial planning efficacy
- Save more
- Generate more value
- Plan taxes prudently and avoid tax litigation and liabilities
- Be fund-sufficient and grow your venture
With these advantages, making a tax plan should be the next item on your list. Here’s how you can make a tax plan.
How to save tax
As per Section 80C of the Income Tax Act, 1961, one can claim a tax deduction of up to INR 1,50,000 per annum on investments made in National Savings Certificates (NSC), Tax-saving FDs, insurance, government bonds, Public Provident Funds (PPF), etc.
By investing in an Equity-Linked Savings Scheme (ELSS), you can not only save taxes but also enjoy wealth growth under Section 80C.
This section of the Income Tax Act, 1961 allows tax deductions on health insurance premiums.
|Tax Deductions up to||Person covered|
|INR 25,000||Self/ Husband/ Wife/ Children|
|INR 75,000||Senior citizen parents|
This section particularly helps save taxes on education loans paid interest for up to eight years and has no upper limit.
Salaried employees who get House Rent Allowance (HRA) as part of their salary can claim a deduction.
|Exemption of||Exemption For|
|The whole HRA, no upper limit||Salaried employees who receive it|
|50% of the basic salary + Dearness allowance||Salaried employees in metro cities|
|40% of basic salary + Dearness Allowance||Salaried employees in non-metro cities|
|Total rent paid or 10% of the basic salary + Dearness Allowance||If you don’t get an HRA, but live in a rented space|
The rule also involves unsalaried taxpayers if they rent a space for living. Although there are no upper limits for salaried employees, the exemption is always in accordance with the lower amount between the basic salary and dearness allowance cut and the whole HRA.
Under Section 24 of the Income Tax Act, you can make avail of tax deductions up to INR 2,00,000 per annum for the interest payable on a home loan.
Section 80TTA and 80TTB
For interest earned on your savings account pool, you get a deduction up to INR 10,000 per annum, which goes up to INR 50,000 for senior citizens.
For charitable donations, you can claim up to 50 percent of the total donated amount within 10 percent of the adjusted total income for the annum. However, the NGOs for which you are claiming need to provide an 80G certificate for the exclusion.
National Pension Scheme (NPS)
An honorary mention to the NPS again! An NPS is an important investment tool for retirement planning. It helps generate a reliable corpus while investing in both equity and debt assets. It can be withdrawn at the age of 60. Not only does it get you a deduction under Section 80C, but also gets you an additional deduction of INR 50,000 on contributions made in the NPS.
Tax gain-loss harvesting
In this method, you sell your non-performing assets albeit earlier to register a loss and avoid tax obligations for it.
Get started with your tax planning now that you know the various tools you can use.