As a citizen of India, if you fall in the income tax bracket, you’ll be liable to pay the unavoidable tax. With the help of smart tax planning, you can save a fair amount of tax legally. Tax planning will channelize your taxable income to various investment options, which will help you save tax. The exact amount of tax savings can be calculated using a tax calculator available online. This article gives you a note on Tax Planning Tips: How Can I Save Income Tax?
Right investments have proved to be one of the best ways to reduce tax liability substantially. There are many investment options available, which let you save more and reduce your tax liability. Depending on when you start with your income tax planning, it has few variants, i.e., short term, long term, purposive, and permissive tax planning.
Tax planning is equally important for first-timers and veteran taxpayers. It permits the taxpayers to make the best use of available deductions and exemptions depending on their investment and make calculations using a tax calculator. Section 80c and 80D of Income Tax Act, 1861 covers most of the deductions mentioning all the limits. At the same time, Section 10(10D) covers exemptions that a policyholder/nominee receives by the insurance provider against the maturity amount.
Tax Planning Tips With Efficient Investment Ideas
Find below a few tips to save income tax legally:
1.Invest in term insurance
Investing in a term insurance plan is necessary with the growing uncertainties and unexpected events. With time, people are moving towards smarter financial planning, and investing in term insurance is one of their moves to get financially covered.
You can avail of term insurance tax benefits up to Rs 1.5 Lakh per annum, depending on the amount you invest. The exact amount you can save can be calculated using an online tax calculator.
2.Buy a health insurance policy
Under Section 80D, if you purchase a health insurance policy, you can avail of tax benefits up to Rs 25000 depending on the premium amount. The coverage under a health insurance policy can be for you, your dependent children, or your spouse.
At the same time, the limit of tax benefits for senior citizens goes up to Rs 50,000 if your spouse’s age or your age is 60 or above. If you want to estimate your tax savings before investing in any health insurance policy, you can use a tax calculator.
3.Invest in Public Provident Fund
Investing in PPF is another way of saving tax. The range of investment is Rs. 500 – 1.5 Lakh on an annual basis, in which the upper limit was Rs. 1 lakh before the financial year 2019-20. If any investment exceeds Rs.1.5 Lakh, no interest is earned on that particular amount.
The lock-in period is usually 15 years, although partial withdrawals are allowed from the 7th year. The deposits in your account should be made at least once a year. You can avail deductions on the amount you deposit and exemption on the interest that you earn.
4.Invest in ELSS (Equity Linked Savings Scheme)
Investing in ELSS can prove to be very fruitful at a later stage. It has a lock-in period of 3 years, and no withdrawal can be made before that. The amount is invested in securities of the stock market, due to which you’ll have to take up moderate to high risk.
If the gains exceed Rs. 1 lakh in a year, you’ll have to pay Long Term Capital Gain tax of 10% on that extra gain.
5.Invest in NPS (National Pension Scheme)
It is a retirement benefit plan regulated by the Pension Fund Regulatory And Development Authority Of India. The amount is invested in equity or debt, and at a later stage, the investment amount will depend on the performance of these assets. Equity exposure cap is different for government employees and others. You can decide how you want to invest in equity or debt and the age-based asset allocation model.
As soon as you turn 60, 60% of the amount can be withdrawn, and the remaining 40% can be used for annuity plans to receive a regular pension. You can also avail of tax benefits annually. Also, you can make premature withdrawals of up to 25% after three years.
After going through these tax planning tips, you must’ve observed how you can save a fair amount of tax legally if you invest smartly. You can save tax and get lucrative insurance benefits, which will provide financial coverage to you and your family. If you have any confusion regarding the tax benefits you’re eligible for, you can make calculations using a tax calculator.