Tax Planning
WHEN TO START TAX PLANNING?
The best time to start planning your tax-saving investments is at the beginning of the financial year. Most taxpayers procrastinate till the last quarter of the year, resulting in hurried decisions. Instead, if you plan at the start of the year, your investments can compound and help you achieve long-term goals. Remember, tax-saving should be an additional perk and not a goal in itself.
THERE ARE TWO WAYS OF TAX PLANNING- DEDUCTIONS AND EXEMPTIONS
What are deductions and exemptions?
Deductions-Tax deduction refers to claims made to reduce your taxable income, arising from various investments and expenses incurred by a taxpayer. Thus, income tax deduction reduces your overall tax liability. It is a kind of a benefit which helps you save tax. However, the amount of tax you can save depends on the type of tax benefit you claim.
TYPES OF DEDUCTION
- Section 80C- Use up Rs 1.5 lakh limit available by investing in the following
- Tax saving fixed deposits
- PPF (Public provident fund)
- Equity linked savings scheme (Mutual Funds)
- National Saving certificate
- Life insurance premium
- Home loan repayment
- Employee provident fund
- Contribute to National Pension Scheme- Additional deduction of Rs 50,000/- under section 80CCD(1B)
- Health insurance premium- A deduction of Rs 25,000/- is available for health insurance premium under section 80D. This is over and above the deductions listed above.
- Get a deduction on your rent. You can claim HRA(House rent allowance) deduction and if you don’t get HRA then you can claim a deduction of Rs 60,000/- under section 80GG.
- Keep some money in your savings account. As interest on savings account can claimed as a deduction under section 80TTA upto Rs 10,000/-.
- Contribute to charity- You can claim a deduction of your charitable donations under section 80G.
Exemptions- A particular income, which is exempt from tax and thus, not included in one’s total taxable income is called an income tax exemption. One sure-fire way to reduce tax liability is to be aware of income tax exemptions available under the Income Tax Act.
Types of exemptions-
- House rent allowance
- Allowance on transportation
- Children education allowance
- Housing loan exemption
- Leave travel allowance
- Food coupons
All the exemptions mentioned above are not discussed in detail due to the following reasons,
- All the above exemptions can be claimed till the limits mentioned in the act and have to be calculated as per the act
- Certain limitations and conditions are applicable on all of the above mentioned exemptions
- As our goal is provide small lessons for our readers. Such topicswill be discussed in detail in further articles