Financial tax planning offers numerous tax benefits that can help you save money and increase your financial security. By taking financial measures to decrease your tax liability, you can save on tax payments and invest the saved amount in plans that earn you more money, many of which come with additional tax benefits. You can avail of deductions, exemptions, and rebates permitted under the Income Tax Act to reduce your tax burden. However, the language used to explain these provisions is often full of financial and legal jargon that can be difficult to understand. To help you navigate this complex landscape, we have compiled some simple financial tax planning suggestions that can help you reduce your tax burden and increase your financial security.
Steps of Tax Planning
Let us look at the basic information needed to start your tax planning journey.
Calculation of Total Annual Income
Calculate your total annual income. This includes income from salary, business, rental income, interest earned on deposits and saving schemes, capital gains income, cash gifts other than family members, or income gained from any other sources.
Calculation of Taxable Income
Financial tax planning involves calculating your taxable income to determine the income on which you need to pay taxes. Luckily, there are several tax benefits available that can help reduce your tax liability. To calculate your taxable income, you can start by deducting Rs 2.5 lakhs from your total annual income, as tax liability on that amount is zero. Next, you can remove tax-free incomes such as the interest generated on PPF accounts and interest up to Rs 10,000 on savings accounts, among other tax benefits. By utilizing these strategies, you can reduce your taxable income and pay less tax, ultimately leading to more savings and increased financial security.
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The Tax Slab
It means the amount of tax needed to pay as per the tax slab or tax bracket you come under. These slabs are given below.
- Up to Rs 2.5 lakhs – Zero tax liability. No tax to be paid.
- Up to Rs 5 lakhs – Rebate on the tax liability of Rs 12,500 under section 87A. No tax to be paid.
- Between Rs 5 lakhs to Rs 7.5 lakhs – Tax liability of Rs 12,500 and add 10% on amounts more than 5 lakhs. Add these two and further include 4 percent health and education cess on the total amount.
- Between Rs 7.5 lakhs to Rs 10 lakhs – Tax liability of Rs 37,500 and add 15% on the amount that is more than Rs. 7.5 lakhs. Add these two and further include 4 percent health and education cess on the total amount.
- Between Rs 10 lakhs to Rs 12.5 lakhs – Tax liability of Rs 75,000 and add 20% on the amount that is more than Rs. 10 lakh. Add these two and further include 4 percent health and education cess on the total amount.
- Above Rs 15 lakhs – Tax liability of Rs 1,87,500 and add 30% of the amount that is more than 15 lakhs. Add these two and further include 4 percent health and educational cess on the total amount.
Tips for Saving Tax
Let us check how to save tax under different sections of the Income Tax Act.
Utilizing Section 80C
The government of India allows deduction of up to Rs 1.5 lakh to be invested in specific saving schemes and instruments under Section 80C of the Income Tax Act. This is done to encourage the saving habits of Indian citizens. Some popular instruments you can invest in are as below.
- Public Provident Fund (PPF) accounts
- Equity Linked Saving Schemes
- 5-year tax-saving deposits
- Pension plans
- Life insurance policies
- ULIPS (Unit Linked Insurance Plans)- For meeting insurance and investment needs.
By investing in these schemes, you can save tax and meet your future financial goals.
Utilizing Section 80CCD(1B)
Investing in the National Pension Scheme (NPS) is an excellent strategy for financial tax planning, offering several tax benefits. By investing in NPS, you can claim a deduction of Rs 50,000 under Section 80CCD(1B) of the Income Tax Act, in addition to the Rs 1.5 lakh deduction available under Section 80C. This means that you can claim a deduction of up to Rs 2 lakhs under these two sections, thereby reducing your taxable income and availing significant tax benefits. NPS invests your money in various debts and equity funds, offering high returns over the long term. On maturity, you can receive a portion of the amount as an annuity, which is taxable, and the rest as regular payments. Overall, NPS offers attractive tax benefits and can help increase your financial security in the long run.
Utilizing Section 80G
You can donate to your favorite charitable institutions and claim deductions up to 10 percent on your income under Section 80G of the Income Tax Act. But the institution should have an income-tax exemption certificate. Get a receipt of the donation and a copy of the income-tax exemption certificate for availing of the income tax deduction.
Utilizing Section 80D
Tax planning and health insurance are two important aspects of financial tax planning, and you can avail of both by utilizing Section 80D of the Income Tax Act, which offers attractive tax benefits. By utilizing this section, you can claim a deduction of up to Rs 25,000 for health insurance premiums paid for yourself, your spouse, and your children. Additionally, you can claim an additional deduction of Rs 25,000 for medical insurance premiums paid for your parents who are younger than 60 years. These tax benefits can help you save money and reduce your taxable income, thereby improving your financial tax planning. However, it’s important to note that these deductions do not include medical bills. By availing of health insurance and utilizing Section 80D of the Income Tax Act, you can not only secure your health but also increase your financial security.
Utilizing Section 10(13A)/ Section 80GG
House rent allowance (HRA) can be an essential aspect of financial tax planning for salaried employees, as you can claim a deduction on rent paid for your residential premises under Section 10(13A) of the Income Tax Act if you have HRA as a salary component. Self-employed individuals can also claim a deduction on rent through Section 80GG of the Income Tax Act. By utilizing these sections, you can reduce your taxable income and save money, which is an important aspect of financial tax planning. Therefore, if you are a salaried employee or self-employed and pay rent for your residential premises, you should consider utilizing the relevant section to claim a deduction on your tax returns.
Looking for financial tax planning suggestions for 2021? Use these recommendations to legally save on taxes and retain more of your hard-earned money. By implementing these strategies, you can invest in a secure financial future.