Tax planning can be a bit of a nightmare for a lot of people. If you’re regularly confused about how to go about it, here are 6 tips to help you plan your tax better.
Every year, most of us start to panic as soon as someone starts to talk about tax planning. Getting those tax plans isn’t that difficult. All you need to do is take a deep breath and keep the list we’re about to share with you handy.
Additional Reading: Get Smart About Your Tax Planning
Before we share these 6 tips to help you plan your tax better, you must know everything about tax planning.
Let’s begin with the basics:
What Is Tax Planning?
The analysis of your financial situation from a tax efficiency point of view to help you plan your finances in the most optimised manner. Tax planning lets you make the best use of various tax exemptions, deductions and benefits to minimise your tax liability over a financial year.
What Are The Types of Tax Planning?
Yes, there are types. Here they are:
Purposive tax planning: Planning taxes with a particular objective in mind
Permissive tax planning: Tax planning that is under the framework of law
Long range and short range tax planning: Planning done at the start and end of a fiscal year respectively.
What Are The Main Objectives Of Tax Planning?
The primary objectives of tax planning should be the following:
- Reduction of Tax Liability: An assessee can save the maximum amount of tax by properly arranging their operations as per the requirements of the law, within the framework of the statute.
- Minimisation of Litigation: A taxpayer wants his or her tax liability to be at a minimum, while the tax collector attempts to extract the maximum. So, proper tax planning aims at conforming to the provisions of the tax law such that incidences of litigation are minimised.
- Productive Investment: One of the primary objectives of tax planning is channelisation of taxable income towards different investment plans. It aims at optimum utilisation of resources for productive causes so as to relieve the assessee from tax liability.
- Healthy Growth of Economy: The growth and development of the economy greatly depend on the growth of its citizens. Tax planning measures involve generating white money that flows freely and results in the sound progress of the economy.
- Economic Stability: Proper tax planning brings economic stability through various techniques such as mobilising resources for national projects or identifying avenues of investment which are productive in nature.
Now that you know better about tax planning, here are 6 ways to plan your tax better:
Calculate Your Taxable Income
Before you even think about planning your taxes, you need to find out your taxable income. Many people often get confused when it comes to calculating this. Remember, your CTC (Cost To Company) is not your taxable income.
To calculate your taxable income you need to first find out your income under various heads. This includes your salary, income from house property, profits of business, capital gains and income from other sources.
Once you have this figured out, you need to calculate your gross income. It’s from this gross income that all deductions under the Income Tax Act are made.
Additional Reading: How To Know Your Taxable Income
Calculate What You Need To Save
Now that you know your taxable income, it’s time to figure out how much you need to save. It’s not just about saving, you need to save in sync with Section 80C.
Section 80C allows investments up to Rs. 1, 50,000 that can be deducted from taxable income. So make sure you keep that in mind!
Additional Reading: How Section 80C Helps You Save Tax
Start Saving Proofs
By proofs, we mean bills and receipts. There are chances that you may have opted for different benefits in your salary structure, like medical expenses, telephone bills, Leave Travel Allowance (LTA) etc.
To avail tax benefits, you will be required to show proof of the same at the end of the year. Therefore, it makes sense to preserve all necessary bills and receipts to help you plan your tax better.
Additional Reading: LTA Explained
Check Your Emergency Fund
Run a quick check on your emergency fund to see how much you have left. To be on the safer side, you should have at least six months expenses available in a tax-saving instrument which is readily accessible. There are many such options to choose from, like liquid Mutual Funds for example.
Invest In A Good Health Insurance Plan
Apart from all the usual benefits of a Health Insurance plan, it also helps you save tax under Section 80D. That’s like killing two birds with the same stone. Under section 80D, you are eligible for deductions as follows:
- Up to Rs. 25,000 for Medical Insurance premiums for you, your spouse or dependent children. This limit is Rs. 30,000 for senior citizens.
- The above limit also includes up to Rs. 5,000 for a preventive health check-up.
- A separate limit of Rs. 25,000 for Medical Insurance premium for parents is also available (Rs. 30,000 if parents are senior citizens). This limit also includes a limit of Rs. 5,000 for preventive health care check-up for parents.
Start Investing In The Right Places
There are a lot of tax-saving instruments for you to invest in and save tax as well. ELSS (Equity Linked Saving Schemes) are a good investment option for you. There are other options that you can also explore like the NPS (National Pension Scheme) etc.
Additional Reading: 3 Reasons Why You Should Include ELSS Funds In Tax Planning
With these tips, tax planning can be super easy for you. If you want to go down the conventional route when it comes to saving tax, you can always invest in a Fixed Deposit.