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Jan 23, 2020 | Source: AxisDirect-O-Nomics
In a country of over 1.3 billion people, only 84.5 million people paid income tax in 2018-19. Not paying income tax is known as tax evasion. However, it is not always necessary to seek illegal means to reduce your tax liability. Professionals like tax consultants can help you manage the tax burden. But what if you do not want to hire a tax consultant? You can use our tax planning tips and advice to legally minimize your tax liability.
What is Ttax Pplanning?
Income tax in India is governed by the Income Tax Act, 1961. The act has various sections that deal with tax deductions, rebates and exemptions. Tax planning is utilizing all allowances, deductions, rebates and concessions available under the law to decrease your tax liability. Tax planning, however, is not limited to investing in tax-saving instruments.
A common practice for many is to make last-minute investments that save some taxes. However, tax planning is a continuous and long-term process that requires making tax-efficient investments that help you create wealth in the long term. Tax planning has become a central part of financial planning and armed with the right financial acumen, there’s no reason why you can’t attempt it on your own!
Tax planning starts with computing your taxable income. The income from salary, income from property, income from business or profession, capital gains and income from other sources together form your gross taxable income. Reduce all deductions allowed in a year to get your net taxable income. Your net taxable income will help you get an idea of your tax liability according to the income tax slabs.
Taxable Income Slabs |
Income Tax Rate and Cess |
Up to Rs 2.5 lakhs |
Nil |
Rs 2.5 lakhs-Rs 5 lakhs |
5% of (Total Income - Rs 2.5 lakhs) +4% cess |
Rs 5 lakhs-Rs 10 lakhs |
Rs 12,500 + 20% of (Total Income - Rs 5 lakhs) + 4% cess |
Rs 10 lakhs and above |
Rs 1,12,500 + 30% of (Total Income - Rs 10 lakhs) + 4% cess |
The income tax slabs for senior citizens (those between 60 and 80 years of age) and super senior citizens (those above 80 years of age) are different. Senior and super senior citizens are provided additional tax relaxations. Additionally, as per the latest rules, a rebate of Rs 12,500 under Section 87A is provided to all taxpayers for income up to Rs 5 lakhs. It efficiently makes income up to Rs 5 lakhs tax-free.
How to plan your taxes?
Once you know your tax liability, you can take steps to reduce it. While planning taxes, one should keep in mind that the primary target is not to reduce taxes but to create a portfolio while doing it. The section that deals with the various deductibles include Section 80C along with Section 80CCC and Section 80CCD. Together these can help in substantially reducing your tax burden.
There are several options that can help you avail tax deductions of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act. Investments in Public Provident Fund, Pension Plans, Equity-Linked Saving Schemes, Life insurance, Tax saving fixed deposits, National Savings Certificate, Employee Provident Fund and Home Loans can help you claim deductions. In the event that you’re unable to exhaust the deduction limit provided under Section 80C, you can claim a deduction for tuition fees paid for two children.
Additional Deductions
NPS: While Section 80C is the primary tool for tax deductions, there are some other avenues too. The government allows additional deductions of Rs 50,000 for investments in the National Pension Scheme under Section 80CCD (1B). The NPS is long-term investment instrument and can help you build a corpus for your retirement.
Home Loan: Repayments for the principal amount of a home loan are eligible for deductions under 80C, but you can also get an additional deduction on the interest component. Under the tax laws of the country, a deduction of Rs 2 lakh is allowed for the interest component of the home loan under Section 24(b).
Health Insurance: Having adequate insurance cover has become a necessity these days. You can get tax benefits for life insurance under 80C, but premiums paid for health insurance are not covered under this section. However, you can avail tax deductions under Section 80D for health insurance premiums. If you combine the benefits provided for dependent parents, your spouse and children, you can claim a maximum tax deduction of up to Rs 1 lakh, subject to various sub-limits.
Other options: Besides various investment options, you can claim deductions under Section 80E for the interest paid on an education loan for yourself, spouse or your children. A tax deduction is also allowed for donations made to charitable organisationsorganizations and relief funds.
Conclusion
Anyone can reduce his/her tax liability to a large extent by utilisingutilizing the tax deductions allowed under the law. If the task seems too tedious, you can opt for online tax saving solutions with us at Axis Direct. You invest in ELSS (Equity Linked Savings Schemes) instruments and avail tax benefits of up to Rs. 1.5 lakhs as well as substantial returns on your investment.
Happy Tax Saving!
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