This is the story of many tax payers. Let’s understand more.
Tax Planning is the process of managing your personal income such that you make the maximum benefits of all deduction, allowances and rebates so that your tax liability is minimized as much as possible within the legal framework.
Actually, if you are planning your investments and your tax strategies properly, it can help you choose the best tax friendly investment. It will ensure that you understand your financial position and are on a right track. This approach will help prevent the last minute pressure towards March end.
According to a survey 30% of the people in India invest only to save tax. There are many tax saving instruments available in our country, each of the product is associated with the different sections of the Income tax act. Let us now see which product lies under which section:-
1. Sec 80C: This is the most popular section under Income Tax act and is used to the maximum by most of the people. The limit of investment under this section is Rs. 1Lakh per year irrespective of your income and tax bracket. The following products fall under this section:-
a) Public Provident Fund (PPF)
b) National Saving Certificate.
c) Equity Linked Saving Scheme.
d) Bank Fixed Deposit
e) Employee Provident Fund
f) Payment on Life Insurance Policies.
g) Principal repayment on Home Loan
2. Sec 80D: Premium paid towards health insurance for yourself, spouse, dependent children and your parents is deductible from your taxable income. The limit is Rs.20,000 for Senior Citizens and Rs.15,000 in all other cases. You can further claim Rs. 15,000 (Rs.20,000 if parents are senior citizen) for buying health insurance policy for your dependent parents.
There are other sections like Sec80DD, Sec 80DDB, Sec80G, Sec80E, Sec24b, Sec80CCG under which you can plan and save tax.
One important point which people generally ignore while investing is “Time Period”. Most of the investment products which are discussed under Sec 80C have different Lock in Period.
For ex. Public Provident Fund and some Insurance Policies comes with a Lock in Period of 15 years. National Saving Certificate and Tax Saving Bank FD’s comes with a Lock in period of 5 years and 10 years. Equity Linked Savings Scheme (ELSS) comes with a lock in period of only 3 years.
One should always try to look out for minimum Lock in period. This can be advantageous as one can move money into different products and gain more, while staying invested in a single product for longer duration would be the perfect example of loss of potential gain from other alternative.
Smart strategies to save tax
Apart from these common deductions which we have discussed above, there are many other ways through which you can plan your taxes. In the below table, you can find the summary of various tax saving methods.
E.E.E. Tax Strategy…
EEE stands for Exempt Exempt Exempt. While making investment money goes through three stages; it is when contribution is made; when money earns interest; and when money is withdrawn.
EEE indicates the tax saving at these three stages. While planning to save tax, most of the people focus only on saving tax at source. Also very few people know about EEE Strategy. Not all of the products which helps in tax saving at source qualify under this strategy. Only PPF, Insurance Policy on Maturity and ELSS are eligible. The interest earned on NSC and Fixed deposits are taxed on maturity.
Plan your Salary Structure.
This is an added advantage to the employee class. Many companies give this liberty to employees to plan their own salary structure. It is very important to understand the salary structure because if it is planned properly then the chances of getting it more in hand are higher. (Salary credited to bank)
Below is the list of components which are usually the part of salary structure and can be used to minimize tax liability.
1. Medical Allowances.
2. Telephone Reimbursement.
3. Leave Travel Allowance (LTA).
4. Food Allowance Coupons.
5. House Rent Allowance (HRA).
6. Perks like transport, driver, etc.
7. Superannuation Scheme.
The employer may or may not offer all the above allowances to every employee. Hence it is important to discuss it with the company officials. Take a look at your salary structure and various salary components available as a part of salary package and analyze if you can leverage it in the best possible manner.
To sum it all, if planned sincerely, one can make right investment decision with the best suitable products. “Don’t let March hit you with uneasy feeling because you have no clue where you stand, be prepared by planning well in time”
A modified version has originally been published on CouponDunia
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