The income earned in a year, is taxable in the following year. For tax purposes, the year in which income is earned is known as previous year and the following year in which it is assessed and considered taxable, is known as assessment year.
The first of April marks the beginning of a new financial year, in which your taxes are computed on the basis of the income earned in that year. At this point, many of us often fail to give tax planning much serious thought. We delay and leave it to the end of the financial year. The end result- chaos and haphazard investing. With the new financial year around the corner, it is the right time to understand the importance of tax planning and it’s efficient saving.
Your Basics-Understand Income Tax
As a resident of India, every individual’s income is liable to be assessed for Income tax under various heads, such as salary, rental income, capital gains etc… The income earned in a year, is taxable in the following year. For tax purposes, the year in which income is earned is known as previous year and the following year in which it is assessed and considered taxable, is known as assessment year.
The Early Bird Catches the Worm
And so goes the saying. Get started with your tax planning right from the beginning of the financial year. This reduces the tax burden and the last minute rush to make investments. Tax planning minimises the amount of income tax that you are liable to pay, and encourages saving and investing for future financial goals. Starting early would mean more time to invest and generate positive returns. A rush at the end of the financial year to make investments could bring in wrong investment decisions, missing out on tax saving opportunities, leading to financial losses.
Understand Your Salary and Entitlement
We all know what we take home at the end of the month. But do we also know that a few components in the salary are tax exempt. Submit relevant documents as proof to your HR to get them as tax free.
- HRA: For House Rent Allowance (HRA) which is part of the salary, the minimum of the following is exempt from tax. The actual HRA received from your employer or, the actual rent paid by you for the house minus 10% of your salary or, 50% of your basic salary (for a metro) or 40% of your basic salary (for non-metro).
- Transport allowance up to Rs.800.
- Medical expenses exempt up to Rs.15000. You would need to submit medical bills for the year.
- Food coupons up to Rs.5000
- Leave Travel Allowance (LTA) can be claimed twice in a block of 4 years.
Know the Sections
The Income Tax Acts provides deductions from your net taxable income under various sections. Section 80C, Section 80D and Section 80G are the most important sections that help save a considerable amount of tax.
Section 80C: This section is by far the most common and well utilized section. It offers a maximum deduction of up to Rs. 1, 00,000 for investments made in any one of the following.
- Public Provident Fund
- Life Insurance Premium: The premiums you pay towards a life insurance policy in the name of self, spouse or dependent children, entitle you to a deduction under Section 80C. Do bear in mind, to be able to claim this deduction, your premium has to be less than 10% of sum insured (applicable for policies initiated after 1 April 2012)
- National Savings Certificate
- Equity Linked Savings Scheme
- 5 year fixed deposits with banks and post office
Section 80D: Your health insurance premiums for self, spouse, and dependent children are eligible for up to Rs 15,000 deduction. If you are supporting your parents, you could claim an additional deduction of Rs. 15,000(for parents below 65 years of age) or Rs. 20,000(for parents above the age of 65 years)
Section 80E: Interest towards education loan taken for higher studies for self or education of spouse or children
Section 80G: Donations to certain charitable institution/trust and national funds (subject to certain limits).
Your Investment Options
To effectively utilising the various sections, the fact of matter is that you are required to make investment in different avenues. Educate yourself and evaluate each one of them to understand what suits you best to meet your financial goal. This is another reason why tax planning must begin in April. The earlier you start, the more time you get to evaluate various avenues.
The Public Provident Fund: A safe bet for the risk averse, a Public Provident Fund (PPF) is one of the most common tax saving investments. This scheme could be opened at a post office or designated bank branches. It comes with a long tenure of 15 years with minimum investment of Rs 500 and upper limit of Rs. 1 Lakh in a year. The deposits in a PPF qualify for a deduction under Section 80C. The corpus is tax free and, it guarantees a tax free maturity and withdrawal benefit.
Life Insurance: Term Insurance, endowment or Unit Linked Plans whatever it be, the premiums are eligible for a deduction under Section 80C. Life insurance is a necessity in any financial portfolio, and it’s imperative to purchase a plan as per individual financial needs. It is primarily a financial tool to protect oneself against uncertainties, and the added advantage is its ability to help save tax.
Health Insurance: The benefit for health insurance plans is for all policies that are approved by the General Insurance Corporation or by the Insurance Regulatory & Development Authority (IRDA).
Tax saving schemes: The market today offers various other instruments that aid to save tax. Equity Linked Savings Scheme (ELSS) are market linked high risk products that provide deductions under Section 80C. Infrastructure bonds under Section 80CCF provide an additional benefit of Rs. 20,000 over and above Section 80C.
Look Beyond the Sections- Use Your Loan
Apart from the provisions of the various sections, you could also use your home loan to save more tax. The principal portion and interest portion independently offer a deduction in your net taxable income. Where the principal offers a deduction of up to Rs. 1,00,000, under Section 80C, the interest offers a separate deduction of Up to Rs. 1, 50,000(Section 24).
The Roadmap to Tax Planning:
Tax Planning is not an exercise that is to be isolated. The whole process should be done in tune with your individual financial goals. With the plethora of tax saving options available in the market, what you choose should predominantly be based on your individual profile and financial goals. So if you are a risk averse individual, ELSS should not really be your choice. You may opt for PPF or other tax saving bonds.
Details of your loans and investments have to be furnished to your employer to avoid any excess deductions. Get your Form 16 from various sources on time at the end of the year to facilitate easy filing of tax. And along with planning your taxes early, file your taxes returns for the previous year before the deadline of 31st July.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal.