Smart Tax Planning

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Smart Tax Planning

Tax planning will help you pay less income tax. Something everyone wants. But smart tax planning will help you boost your portfolio.

WE , DAVE FINTECH wealth advisors, help you form Tax strategies for smart tax planning.

Tax planning allows a taxpayer to make the best use of the various tax exemptions, deductions, benefits to minimize their tax liability.

Modern definition of Tax planning is MAXIMUM GAIN+FUTURE PLANNING.

Few tips which can help you for better tax planning in making your financial life easier:

Your cost to company (CTC) or Business Income is not equal to your taxable income, there are many deductions available which can significantly reduce the taxable income and hence the Income Tax.

Steps to find out the taxable income of Individuals:-

  1. Find out the income under the different ‘heads of income’, which include:-
    1. Salary
    2. Income from House property
    3. Profits and gains of business or profession
    4. Capital Gains
    5. Income from other sources
  2. The income is subjected to ‘adjustment of losses’ of the current years and earlier years. The income after the adjustment of losses is the “gross total income”.
  3. From the gross total income(GTI) the prescribed ‘deductions’ under the Income Tax Act are made

Deductions can be:

1a. House Rent Allowance (HRA)

Tax exemption on HRA is least of the following:

  1. Actual HRA received
  2. Actual rent paid reduced by 10% of salary
  3. 50% of basic salary if the taxpayer is living in a metro city or 40% of basic salary if the taxpayer is living in a non-metro city

The amount as per the above formula is allowed to be deducted from your total income for tax purposes.

1b. Home Loan

Your Home loan has two parts, the Principal and the Interest.

  1. The interest paid up to Rs.2 lakhs or the actual amount that you have repaid can be claimed as deduction under Section 24 of the Income Tax Act.However, if you have rented out your property, then there is no limit of Rs. 2 lakhs. Your taxable income can be reduced by the amount of Home Loan interest.
  2. You can claim deduction of the Principal amount that up to a maximum of Rs.1,50,000 under Section 80C.

Find out how much you need to save to make full use of section 80 C. Section 80C, allows investments up to Rs 1,50,000 to be deducted from taxable income. The Employee Provident Fund (EPF) is eligible for 80C, hence the investments for tax benefits your need to make will be Rs 1,50,000 minus your EPF.

You may have opted for different benefits in your salary structure, such us Medical Expense, Telephone Bills, Leave Travel Allowance (LTA) etc. You would be required to show proof for the same at the end of the year, so it would be prudent to keep them safe in a digital/physical folder as applicable, to avoid any misplacement.

Check out how much emergency fund you have, typically one should have at least 6 months expenses available in an instrument which is readily accessible. You may opt for Liquid mutual funds to park your emergency fund. These plans give better returns than savings bank account and are very accessible too.

Health insurance is one of the must have financial products. It also gives you income tax benefit under section 80 D. Under section 80 D, you are eligible for deduction as follows:

  1. Up to 25,000 Rs. For Medical Insurance Premiums for you, your spouse or dependent children. This limit is Rs 30,000 for senior citizens.
  2. The above limit also includes up to 5,000 Rs for preventive health checkup.
  3. A separate limit of 25,000 for Medical Insurance premium for parents is also available (30,000 Rs if parents are senior citizens). This limit also includes limit of 5,000 Rs. For preventive health care check-up for parents.

Life insurance premium is eligible for deduction under section 80 C. There are some Mutual funds products which provide benefit of Tax deduction+ Insurance cover + good returns on invested amount over a long time period.

Equity Linked Saving Schemes – You can save your tax by investing in the ELSS schemes of Mutual funds. The maximum amount that can be claimed under section 80C deduction for ELSS is 1,50,000 Rs. There is a lock in of 3 years, however you may choose to remain invested for longer term. The Long term returns of the ELSS mutual fund category are around 12-20%.

The tuition fees paid (up to 2 children for each parent) is eligible for deduction under section 80 C. The educational institute should be located in India. Pre nursery, nursery class & play school fees is also eligible.

If you are looking to invest beyond 80C for tax saving, you can look into the National Pension Scheme (NPS), the limit for which is 50,000 Rs. over and above Rs 1,50,000 of 80C.

There are many tax saving instruments that are not worth your money. You will do well to avoid them; these include Tax Saving FDs, Endowment Plans & ULIPs of Life Insurance companies. These products are either not tax efficient (FD) or provide very low returns or complex to understand.