The season of your Human resources department asking you for declarations regarding your income tax return filing has arrived this year. So, before you commit, invest and declare your money in various tax saving options, we would suggest you read this blog post and then decide. If you have already decided and executed this year’s tax-saving investments, then it’s never too late to start thinking about the next year’s tax planning.
This blogpost tries to define tax planning and how to efficiently execute it with various tax saving investment options available in India.
Tax planning is an upgraded version of your every year tax return filing activity with your CA which also includes managing the investments related to your tax profile. Tax planning has become a necessary part of our Financial Planning activity.
We strongly advocate the practice of filing Income Tax returns every year by every earning individual even if they do not cross the tax-free bracket in our country. Conventional tax filing has been an exercise for individuals to file their Income Tax returns and pay their taxes. In our current modern economy, the government and the income tax department are being very proactive in tracking our income tax returns and linking it to every aspect of our financial life like loans, credit scores, leasing, etc. For this reason, tax planning has become a very critical aspect of an individual’s finances every year to efficiently save taxes while filing income tax returns.
Tax planning should optimize your tax bill by using various investment options that are suitable to your needs and profile. When it comes to properly plan your taxes for every financial year, the choice, timing and profile of the investments are very important.
Let us take a micro example of a salaried individual aged 30 years and earning 70,000 a month. Most of us already know that we have a section 80c that enables us to invest in various investment options and claim a tax deduction that reduces our tax bill. Rather than exploring options in the last quarter of the financial year (Jan – Mar), when we get a call from our HR to declare their investments, this activity can be planned well ahead in the financial year and can be well efficient and effective.
Tax planning and investment planning go hand in hand as we use some investments to save taxes and we pay taxes on some investments. Either way one cannot live without the other.
We not only need a CA but also a certified investment advisor when it comes to tax planning.
Investments / Expenses that can reduce our taxable income
There are three major and basic investments or expenses that many of us earning individuals have.
- House Rent Allowance
- Medical Insurance
- 80C investments
We talk about HRA (house rent allowance) because most of the cases we can claim it in various legal ways as long as we do not own a house on our name. If we own a house on our name, then it is very difficult to claim HRA deduction on our income.
Medical insurance in major tier 1 and tier 2 cities has become a new necessity with the ever-increasing medical costs and financial burden of medical emergencies.
The 80C puzzle
There are various options available to save your taxes by reducing our taxable income. Taxable income is the final income on which the government makes us pay an income tax. The lesser the taxable income, the lesser tax we end up paying.
Section 80C of our income tax is the most popular investment vehicle to reduce our taxable income.
The limit under this section per year is Rs. 1,50,000 (National Pension Scheme has an additional Rs. 50,000 benefit limit per year).
The major relatable investment options under 80C are:
- Employee contribution towards PF (Provident fund)
- Public Provident Fund Contribution
- Life Insurance Premium
- Equity Linked Savings Scheme (ELSS)
- Unit Linked Insurance Plans (ULIP)
- Principal Repayment on our Home loan
- Children’s tuition fee
- National Pension Scheme (NPS)
- Post Office / Government / Bank FD Saving Schemes