Have you kept track of your income and how exactly you can optimise your earnings by investing in tax-saving instruments? Tax planning is a key element of your personal finance and spending an hour learning all about it can indeed help you save taxes, almost a month’s worth of it.
If you don’t make use of all the deductions and exemptions that have specifically been made available for tax efficiency, it could end up being your loss. There are largely three types of tax planning India has, including:
This is one of the methods of tax planning that adhere to the provisions of the Income Tax Act.
This is a tax planning method that is taken up when you want to plan your taxes so as to meet a specific financial goal.
If you plan your investments or savings on the basis of deductions with either a long or a short-range goal, it is called short or long-range tax planning. So, there are tax-saving instruments which have lock-in periods that don’t allow for redemptions, for example, and you may take them up to ensure tax planning.
Also, talking about tax planning India offers; there are two broad categories: tax planning for individuals and tax planning for corporates. While corporate tax planning is about reducing tax liability for companies, tax planning for individuals is all about lower tax liability for individual assessees.
So, what are the tax planning characteristics that help you optimise your earnings and lower your tax liability? Typically, tax planning characteristics include investments to lower taxes, planning finances to ensure there is a minimal amount of tax attracted and tax filing process by itself.
One of the key elements of tax planning India offers is investments. By investing in the right instruments, you are legally allowed to benefit. Sec 80C is your go-to section when it comes to claiming tax benefits. As per Section 80 C of the Income Tax Act, you can claim a deduction of up to Rs 1.5 lakh on your income that’s taxable. Also, you can invest in tax-saving options under 80 C such as equity-linked savings scheme or ELSS, which is essentially a mutual fund scheme that is equity-oriented. This way, you not only save tax but also generate wealth. You can also invest in schemes like the National Savings Certificate (NSC), tax-saving fixed deposits and public provident fund (PPF). Also, you can claim deductions on tuition fees for your kids and repayment of home loan principal. The amount paid in the EMI towards interest is not eligible for a tax deduction.
Section 80CCD provides deductions for taxpayers in the case of investment in the National Pension System or NPS. Under Section 80CCD (1) and (1b) combined, you can avail of a total deduction of Rs 2 lakh if you invest in NPS annually.
However, Section 80C is not the only provision to claim deductions. You can also claim deductions under Section 80D of the IT Act. Under this section, you can avail tax deduction on premium paid towards health insurance for yourself, parents, spouse and your children.
| Case | A | B | C |
| Individual and parents below 60 years | 25,000 | 25,000 | 50,000 |
| Individual and family below 60 years but parents above 60 years | 25,000 | 50,000 | 75,000 |
| Assessee, family and parents over 60 years | 50,000 | 50,000 | 1,00,000 |
A: Premium paid for self, family and children; B: Premium paid for parents;
C: Deduction under 80D
Section 80E also lets you claim deductions for education loan; there is no limit on the amount allowed as deduction. While Section 80C provides deduction under tuition fees the 80E section provides a deduction for higher education loans. The deduction is only for the interest component of the EMI and not the principal.
As part of Section 80EE, you can claim a deduction of up to Rs 50,000 if you are a first-time homebuyer. However, the value of the house must be lower than Rs 50 lakh and your loan amount must be Rs 35 lakh or lower. Here, a deduction is for the interest component of the loan.
Further, any donations made to charities or qualified organisations are also eligible for exemption of between 50 to 100 per cent, under Section 80G.
One of the methods of tax planning is also about looking at your own salary structure carefully, apart from your investment plans. If your salary has the house rent allowance component, a set of provisions apply while not having access to HRA means you can claim deduction under Section 80GG.
If your income has the HRA component, you can claim tax exemption under it. Your deduction will be the lowest of three scenarios: your actual HRA given; 50 per cent of income (basic+DA) for metro residents and 40 per cent for non-metro residents; total rent paid minus 10 per cent of your income (basic+DA).
If you have no HRA component in your salary or if you are self-employed and have never received HRA for the year you are claiming a deduction for rent paid or you/your spouse/minor child/Hindu Undivided Family (HUF) don’t own residential property, you can look up Section 80GG. As per Section 80GG, you can claim the lowest of three scenarios: Rs 50,000 per month; 25 per cent of total income (minus long-term or short-term capital gains and certain deductions ); rent minus 10 per cent of income.
Take, for instance, that your annual income is Rs 15 lakh and you follow the old/existing tax regime and not the new tax regime. Assuming your deductions under Section 80C investments, NPS, medical insurance premium, standard deduction, and home loan interest will fetch you a deduction amount in the range of Rs 4.85 lakh, your taxable income drops and your income tax liability will be Rs 1.22 lakh for the year with some cess involved.
Your liability gets lower as you use the various sections of the IT Act for deductions. The more efficient you are with tax-saving investments, the better it is for your tax liability.
Without investments and deductions under Sec 80 C, your tax liability goes up substantially as your taxable income rises. So, without deductions, your taxable income will be Rs 15 lakh and you will have to pay tax for 30 per cent income tax slab which adds up to Rs 2,62,500 and with cess around 4 per cent, your total income tax liability is Rs 2,73,000.
The amount you pay per month without deductions is Rs 22,750. The amount you pay when you have opted for various deductions is in the range of Rs 10,160, less than half. So, this way, when you invest time in one of the methods of tax planning you almost save a month’s worth of tax.
Tax planning in India ensures that individuals can plan their personal finances and investments better, ahead of filing their taxes. Efficient methods of tax planning will help you save money, ensure compliance and also boosts your investments. Acquainting yourself with the various sections of the Income Tax can offer significant clues on how to maximise your investment, ensure savings and also lower your tax liability.
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