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How To Plan For Tax Savings This Year
Before locking funds in a new tax saver, you must first evaluate whether you need to invest at all this year
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The tax season is fast approaching. Very soon, many of us would scurry around and start grappling with bewildering alpha-numeric combinations like Section 80C and 80D. Many of us work out our tax planning activity in the last three months of the financial year and few even right at the end.
And inevitably, it is only after we have invested our money in instrument that all our friends are recommending, do we realise that we have locked our money in places where either the returns are lower or risks are higher.
The income tax act provides for certain deductions that an individual may claim and thus reduce the gross total income thereby reducing you tax liability. These benefits are largely confined to Section 80C of the Income Tax Act. According to Section 80 C, an amount equal to the investment that you make in certain specified instruments or an expense that you incur up to a maximum of Rs 1.5 lakh in a financial year reduces your GTI by the same amount. This in effect, reduces your taxable liability and, therefore, the tax payable.
Some of these section 80C instruments may not be investments but comes as an expense head too such as tuition fees. Also, some of them such as life insurance policy comes with annual commitment to keep paying the premiums. In addition to section 80C, there are other avenues too that help to reduce tax such as health premium of Mediclaim under section 80D, interest paid on home loan or education loan under section 24 and section 80E respectively.
Before you venture out looking for the right tax saver, run this simple exercise to evaluate whether you need tax saving for the current year or not.
Non-80C deductions: First, look at all Non-80C deductions like Interest paid of home loans, Health plans, Educational loan
Section 80C outflows: Then consider the Section 80C-related expenses like Children's tuition fees, Principal repayment on home loan.
Existing Section 80C commitments: Consider all the existing Section 80C commitments such as Employees' Provident Fund (EPF) and life insurance.
Running this exercise, gives you a total of existing commitments under Section 80C, 80D and other deductions. Now, from your gross total income, reduce the amount and arrive at the taxable income.
To reduce taxable income further and provided the limit of section 80C isn’t yet exhausted, look for the right Section 80C investments. Here's a reckoner on all possible trims.
The deductions available under Section 80C include benefits for expenses incurred as well as for investments made. The investment-related tax breaks are largely on specified investments, such as five-year notified tax saving bank deposits, life insurance premium, Employees’ Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens’ Savings Scheme (SCSS) and Equity-linked Savings Scheme (ELSS) from mutual funds (MFs). Repayment of the principal on home loan and payment of tuition fees also qualify for tax benefits under Section 80C.
Once, Section 80C gets exhausted, one may make use of a new tax benefit introduced from this year. Most taxpayers having exhausted their section 80C limit of Rs 1.5 lakh a year can now look at National Pension System (NPS) to save for their retirement and in the process save additional tax. An additional deduction of up to Rs 50,000 is made available in NPS from the financial year 2015-16. For someone in highest income slab paying 30 percent tax rate, it’s an additional savings of about Rs 15,000 a year.
The right way is to plan for tax saving in the start of the financial year as it helps to link each tax saver to one’s goal. Planning to save taxes should be in line with your overall financial planning which caters to meeting various goals in life as well. If you are one amongst those looking to save tax, plan according to your life goals and not merely for saving taxes.