Paying tax is mandatory as per the law, whether you’re a salaried or self-employed or owning a business. The taxes are utilised for various development activities across the nation. Read on to know about tips to save taxes.
If you’re one of those concerned about losing a lot of money due to heavy tax cuts, there are some provisions under which you can maximise your savings with efficient tax planning. When you have a tax plan, you can reduce your tax liability by using tax deductions. Let’s understand what tax planning is and what tips you can implement to begin the process.
What is Tax Planning?
Tax planning is a process of analysing one’s financial situation from a tax point of view. Every individual needs to actively understand tax planning, which forms a crucial component of your life’s financial plan. The process comprises the timing of the purchase, the timing of income, and other expenditures. It also considers retirement and investment plans so as you can avail of the best possible tax deductions.
If you’re a salaried individual, tax planning will help you to save more. For a business owner, the plan will help save money that can be utilised for investment and growth. Here are four tax planning tips for the year 2020-21
- Estimate your taxable income
The first step of tax planning is the estimation of your taxable income. Once you know how much amount you will be required to pay in a year, then accordingly you choose investment options to reduce your tax liability.
- Know the tax deductions
As per the income tax law, you can qualify for various tax deductions if you have started investing in tax saving investments. Below are the deductions as per different sections of the IT Act:
- Section 80C: As per this section, you can start investing in various tax saving investments such as Public Provident Fund (PPF), Tax Saving Fixed Deposit accounts, life insurance policies, pension plans, or mutual funds. Investment in any of these instruments will serve two objectives – help you create a corpus for future and second tax savings.
- Section 80E: If you have an ongoing education loan, you are eligible for tax deductions under this section. As a taxpayer, you can claim for a tax rebate on the repayment of interest amount on loan.
- Section 80CCD: You can claim tax deductions if you have investments of Rs.50,000 in the National Pension Scheme (NPS)
- Section 80D: If you have health insurance, you get to claim a tax rebate of up to Rs.25,000 in a year for the premiums you pay for the policy that covers you, your spouse, and your child. Additionally, if you have a policy that covers a senior citizen, the deduction is permissible up to Rs.50,000 in a year.
- Section 80G: If you are engaged in any charitable activity, you can get deductible up to 10% of your income under Section 80G. Make sure you have the receipt from the institution, only then you can ask for a tax deduction.
- House rent allowance
Every employees’ salary comprises House Rent Allowance (HRA). You can claim the tax exemption component as per the income tax law if you stay in a rented property.
- Utilise deductions on interest payments on loan:
Most people know about tax deductibles on the principal home loan amount applicable under Section 80C of the IT act. You can also claim tax deductions on interest payments on home loan and education loan under Section 24 and Section 80E, respectively.
Regular watch on tax liability is crucial. It would help if you did tax planning in advance so that it wouldn’t be difficult for you to pay the tax at the end of the year. You will pay only what is expected, thus maximising your savings.