After taking no steps to save taxes, many people feel helpless at the time of filing their Income Tax Return (ITR) as they end up paying heavy taxes. Many of such people vow to take all the measures to reduce tax outgo soon after filing their ITR, but to rue again at the time of filing next year’s return of income after failing to take any action.
However, there are many conscious persons, who take all the steps that they can to reduce their tax liability.
“Complete freedom from taxes is a farce. Rather plan your finances in such a way that you earn and save on taxes. Tax planning sans financial planning is futile. Remember that you work for money in the first half of your life. In the latter half of your life, let your money work for you. This is however not possible unless you have taken care of your taxes too,” insists Brajmohan Singh, ESOP expert and managing partner, BMSA.
There is no way one can save the entire tax outgo after reaching a certain income level, but may reduce the tax outgo. Tax-saving investments not only help in saving taxes, but may also help in achieving many life goals, if the investments are aligned with the objectives of financial planning.
“There is no escaping death and taxes. This means that achieving complete freedom from taxes is only second to wishful thinking. However, if you are talking about direct taxes, there may be some ways to lessen them, if not avoid them completely. Having said this, escaping the brunt of paying taxes should not be your aim. Instead, manage them skilfully so that you do not end up paying extra. The ongoing tax season has put many people in a tizzy as they rush to park their money in investment options to avail of tax deductions. Taxpayers face this kind of turmoil every year as they care less to learn about the tax-saving investment options available,” says Singh.
Singh lists the ways, through which you may avoid paying more on taxes:
Any naive person would quip how not revealing your income can help one escape the tax burden. This would have been possible had India not progressed on the digital front. But with the linking of all businesses and bank accounts with citizens’ PAN and Aadhar Cards, there is no way that the Income Tax Department would not know how much you earn.
The next best step you can take, therefore, is to learn about the various tax saving measures.
To start with, you can save on taxes by parking your money in investments pertaining to Section 80C of the Income Tax Act. Individuals and Hindu Undivided Families (HUFs) can claim deductions up to Rs 1.5 lac under this section in any financial year.
These investment options include –
- Five-year bank fixed deposit (FD)
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Equity-linked Savings Schemes (ELSS)
- Unit-linked Insurance Plans (ULIP)
- Sukanya Samriddhi Yojana (SSY)
- Senior Citizen Saving Scheme (SCSS)
Have you bought health insurance? Did you know that you can claim a maximum deduction up to Rs 1,00,000 (Rs 50,000 towards premiums paid for self and Rs 50,000 paid towards health insurance bought for senior citizen parents) under this section? This way, you are not only financially adept to pay for hospitalisation and subsequent medical treatment of your family, but also claim deductions on health insurance plans.
Section 80EE/Section 24
The joy of being able to buy your house is second to none. But, then comes the liability of home loan repayment wherein the equated monthly instalments (EMIs) go toward both interest and principal components of the borrowed money. Under this section, you can claim a deduction of up to Rs 50,000 on home loan interest.
There is another side to this income tax benefit. Under Section 24, you can claim a deduction of up to Rs 2 lakh (Rs 1,50,000 if you are filing returns for the last financial year) on your home loan interest if you or your family reside in the house property. However, if you have let out the house on rent, you can claim a deduction on the entire interest amount paid during the financial year.
The government recognises how each of us is accountable for fulfilling social duties and responsibilities. This explains why it rewards you by allowing you to claim deductions on donations made to charitable institutions under this Act.
The government in recent years came out with the National Pension Scheme (NPS) under the Pension Fund Regulatory and Development Authority (PFRDA) which allows you to contribute regularly to create a solid retirement corpus. If you are looking to save tax on your investments, you can claim a deduction up to Rs 50,000 on the amount that you credit to your NPS account.
Deciding between old and new tax regimes
There is not much difference between the old and new tax regimes. An important thing to note is that while the new income tax regime offers liberalised tax slabs sans exemptions, the old tax suits those best earning more than Rs 15 lakh in a year, thus, making them eligible for deductions of around Rs 2.5 lakh.
Seeking complete freedom from tax and hence planning investments around it is a blunder. Focus on planning and securing your finances first before you move on to the next stage of planning your tax deductions.