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1-2-3 of better tax planning

The good news is that you still have some time to file your Income-tax returns. The bad news, however, is that you might have missed on making tax-saving investments in good time and may not be able to use that benefit. Having said that, worry not, as it is never too late to start putting your finances in order because tax planning is not merely about saving taxes, it is about better financial planning. Here are some easy steps to help you plan your taxes better for the coming year.

Let us establish the foundation first, let’s assume that you earn ₹10,00,000 every year, which means that you need to pay 20% in taxes! Yes, it’s true. By making tax-saving investments up to ₹1,50,000 you bring down your taxable income to ₹8,50,000 which is frankly a significant difference. 

Start early

As mentioned, do not wait until the deadline is upon you make tax investments i.e 31st March of next year. Give yourself enough time to plan on tax-saving investments so that you do not end up investing in schemes that may not be suitable for you (which happens way too often and get stuck with chunky life insurances for a lifetime). In case you realise, you may have a higher risk appetite and FDs may not be the ideal investment for you. Making tax investments in a rush may also result in inadvertent mistakes on your part. Give yourself enough cushion time. Start your tax planning at the beginning of the financial year (we are in August 2019 you can start now).

Figure out your tax liability

Next, you need to figure out how much your income tax you need to pay. This is easy to do if you are a salaried employee, but even if you run a business, you can draw up a rough estimate of what you expect to earn and plan accordingly. For salaried people, knowing your tax bracket can help a lot especially when you are negotiating a new job. If you are financially aware, you can discuss your compensation package in a manner which may provide you with a better break-up in the taxable component and the allowances component of your salary. If you are a consultant or work from home, you can reduce your taxable income by declaring expenses like a driver’s salary, travel expenses, entertainment expenses, establishment costs and more.

How to reduce your tax liability

There are several schemes offered by the government to save tax. These are mentioned in Section 80 C/ Section 80 CCD and Section 80 D of the Income Tax Act. You can invest up to ₹1,50,000 in tax saving schemes to reduce your taxable income.

These investment schemes could be :

  1. PPF (Public provident fund)

  2. NSCs (National Saving Certificate)

  3. ELSS (Equity-linked savings schemes ) which are mutual funds with a 3-year lock-in FDs with a five-year lock-in.

  4. Life insurance premiums also are a part of this.

Section 80 D has a provision for saving if you buy medical insurance up to ₹25,000. You can also claim a deduction of up to ₹50,000 if you are paying off a home loan under Section 80 EE.

Personally, I learnt late that if I was locking my money in a tax saving investment, I was better off doing it in a mutual fund than in any other place and I will tell you why.

  1. You end up paying tax on the interest you earn on your FD and NSC.

  2. PPF is locked in for 15 years so I am not comfortable with that long a term.

  3. I had some lousy insurance policies (because insurance is not an investment) bought early in my career that I couldn’t get out of.

  4. If I was comfortable putting my money away for 5 to 7 years I was better off doing it in a tax saving mutual funds, which not only gives me good returns, it helps me beat inflation too.

At Basis, with our tax saving option, we can help you calculate how much you can save on taxes while making the tax-saving investments.

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