A Complete Guide on How to Save Income Tax

Have you ever dreamt of isolating your income from probable taxes? We bet you did, maybe countless times. But let face it- this is something you can’t refuse or overlooked. Well, most of us look at taxes as a financial burden. What could maximize our stress could be a lack of knowledge in regards to tax planning. The taxpayers spend their lot of time figuring out ways to maximize tax saving. If tax saving is our goal, then look no further. This guide will explain everything regarding how to save income tax and offers comprehensive viewpoint on profitable investments. Further, in this article, we will guide you on how you can save on income tax through proper tax planning in India.

What is Tax Planning in India?

It is a logical analysis of a financial position from a tax perspective. It allows a taxpayer to make the best use of tax exemptions, deductions, and benefits to minimize his tax liability every year.

Individuals, businesses, and organizations do proper planning of taxes in order to assess their financial profile. By this, they save on the taxes paid on their annual income and profits.

With proper tax planning in India, both first time tax payers and veteran tax payers can be benefitted. It allows to save an appropriate tax amount which is paid to the government to promote economic activities, and personal savings are also managed.

What are the different methods to plan tax properly?

Every citizen should look to carry out proper planning of income tax. It will help you get benefits that you can avail with tax saving schemes in India. It is done by using the right mix of investments to minimize the tax liabilities.

The different methods of tax planning are discussed below:

• Short term planning of Income Tax : It means planning is done closer to the financial year and selecting the best investment options to save tax. However, on the flip side, you may end up taking hasty decisions to file ITR at the last minute.

• Long term planning of Income Tax : As you would have heard, it is said that “well begun is half the job done.” Therefore when you start planning your tax saving investment at the start of the financial year, it is called the Long term planning. A well chalked out plan helps in the long run.

• Purposive planning of Income Tax : This means specifically planning the taxes in order to avail benefits by taking right investment decisions through correct selection of the investment, replacing the assets, business expansion programme, etc.

• Permissive planning of Income Tax : This means tax saving investments with a view to avail tax concessions, deductions, and other exemptions permitted under law. 

Tax-saving and the Income Tax Act

1961 was the year when the Income Tax Act came into effect. Everything concerning imposition, collection, and recovery of income tax comes under the radar of the Income Tax Act. As a taxpayer, you may have multiple channels to earn money during your life. As per income tax 1961, your profits or earnings attract taxes in a given financial year.

Whether you are a private employee or an entrepreneur or whether you mill out income from renting or investment, you are accountable for paying taxes to the government. To ease the complexity of tax saving, the Income Tax Act’s section 80C, 80D, and 80G suggest numerous ways to maximize your savings on taxes. If you were figuring out a solution for tax saving, here are some recommendations that you might be interested in. 

• High-risk appetite : If you are a proactive investor and expecting high returns along with tax benefits under Section 80C, you can opt to invest ₹1.5 lakh per year in Equity Linked Saving Schemes (ELSS). It is nothing but a tax saving mutual fund that has the potency to double your return. In short, this is an effective way of availing short-term tax benefits and impressive long-term returns.  

• Moderate risk appetite : If you are the one who has a moderate risk appetite, you can invest partial income in ELSS and the rest in tax-saving fixed deposits. This strategy helps you avail tax benefits under Section 80C and render a base to balance your risk and returns.

• Low-risk appetite : If you are a risk-averse, you can invest in Public Provident Fund (PPF) or saving fixed deposits. Adopting this strategy helps you make a tax deduction of ₹1.5 lakh under Section 80C and the minimum risk exposure. However, here you can’t expect a high rate of return on investment. It could turn into a severe issue if you take inflation into perspective. 

Let understand this through an example – Let’s say you are availing long-term investment in Public Provident Fund (PPF) for your child’s education. And all you are doing this under the influence of education inflation, which lies somewhere around 10-12% every year. It means you are not going to make a good return. Precisely, you can save up to ₹46,800 on tax every year via these investments. 

Tips to save Income Tax

Here are some tips that can assist you in saving tax on your income:

• Tax saving through interest payment on loan : In case you have a loan like an education loan, car loan, personal loan or a home loan, then saving tax becomes easy. The government permits tax benefits for individuals who are repaying loans. There are some investments that you may consider under Section 80C- Life insurance premium paid towards self, or spouse or child, contribution in PF schemes, subscription to units of mutual fund equity linked saving scheme prescribed and notified by the Central Government. This can prove to be a much better tax saving option if the planning of tax done by payment of loan is executed wisely.

• Buy a health insurance policy : As per section 80D of the Income tax Act[1], the premium paid on health insurance policies is allowed as deduction from total income. Deduction of up to 15000 rupees is permitted for insurance of self, spouse and dependent children. This can also prove to be a great option to save tax.

• Make a donation : Another way of saving tax on your income is by donating. As per section 80G of the Income Tax Act, an individual can claim deductions up to a  limit for contributions made to the charitable organizations or to Non-Governmental Organizations.  This will not only enable you to save tax but also bring some virtue.

• Equity mutual funds : You can also invest in the Equity mutual funds. Investing in Equity mutual funds is a good way to make your profits 100% non-taxable. However, you are advised not to sell your equity shares before the completion of one year period as anything less than 12 months can incur tax on profits.

• House rent allowance : You may claim house rent allowance to save tax on house rent, but it is worth mentioning that it is only applicable if you stay in a rented accommodation.

• Medical bills : You may also use the receipts of your medical bills in order to use them for tax saving at the end of the year. A specified amount is non-taxable on medical expenses for you and your family.

• Daily travel allowance : You can also avail tax benefits from your company for conveyance. It will help you save tax on conveyance allowance. Moreover, you don’t require submitting any proof for the same.

Conclusion

Well, precisely, there are dozens of options out there that could save income tax easily. Smartly allocating the income in tax-averse schemes is the best way to maximize the tax saving. But you don’t have to rush through and blindly opt for any investment scheme to save income tax. An expert analysis might be the best option for those who aren’t familiar with investments that lead to tax benefits. However, we are confident that this information will deal with most of your tax-saving queries with ease. Kindly keep us informs if you need some assistance to clarify the doubts. To do so, all you need to scroll down and drop your queries in the comment section.