Tax planning is important for everyone, including working professionals. As we get into 2023, it is a good time to have a proper plan in place for tax savings in the New Year. To make this easy for you, we talked to some tax and legal professionals over email to find out the six most important things working professionals should do to save taxes in 2023. Let’s take a look:
1. Keep Yourself Updated
As we live in the information age, it is important for everyone to remain updated. Thankfully all the information required for tax saving is available for free on the Income Tax website.
“The Government has launched a very user-friendly website for taxpayers. Working professionals should ensure that they regularly visit and read the FAQs and guides available on the Income Tax website. They are easy to understand and will make you a responsible and wiser taxpayer. Subscribe to blogs which relate to tax and investments,” Sameer Jain, Managing Partner, PSL Advocates & Solicitors.
2. Make the Right Investment to OptimizeTaxes
“Professionals should make the appropriate investments under the right heads in order to be able to utilize tax breaks offered by the law. Equity-linked saving schemes are great examples of investments that also allow taxpayers with benefits under tax law,” – Pallav Pradyumn Narang, Partner, CNK
Adding to the above, Jain says the Government of India has permitted tax deductions on the invested amount, under Section 80C of the Income Tax Act for certain types of investments.
“The total exemption one can claim through Section 80C investments cannot exceed Rs 1,50,000. By adding NPS investments (Section 80CCD), one can claim an additional deduction of Rs 50,000, bringing the total deduction to Rs 2 lakhs. These investments inter alia include Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Equity Linked Savings Scheme (ELSS), National Pension System (NPS), Sukanya Samriddhi Yojana (SSY), Senior Citizen Savings Scheme (SCSS), Fixed Deposits (FDs) of 5 years or more, etc,” says Jain.
Also Read: Income Tax relief from Budget 2023: What working professionals expect
Following are some tax-saving investment options that you can explore:
Aditya Chopra, Managing Partner, Victoriam Legalis – Advocates & Solicitors, says Indian citizens can claim a deduction of taxes under section 80, 80CC & 80CCD upto Rs 1.5 lakhs under the following heads:
- Public Provident Fund (PPF): This saving scheme can be availed at most banks and post offices in Indian for a tenure of 15 years at 7.10% rate of interest, which is tax-free, and the interest rate changes every quarter.
- Employee’s Provident Fund (EPF): Contribution of 12% of the salary made toward EPF scheme is counted towards the limit of Rs.1.5 lakh under Section 80C.
Deduction under other provisions of the Income Tax Act.
Home Loan: A tax deduction can be claimed on the interest payable on house loan under Section 24 of Income Tax Act. A tax deduction can be claimed up to Rs.2 lakh but there is no upper limit in case the property let out on rent.
Long-Term Capital Gains: Taxpayers can save money on tax through long-term capital gains, provided they receive this gain amount by selling any long-term capital asset over a period of 3 years and then investing it in specific instruments.
Donations: “By donating money for social or charity purposes or by making contributions to the National Relief Fund, citizens of India can save money on tax by claiming deductions on the amount they spent on donations,” says Chopra.
3. Buy Health Insurance for Yourself and Family
Experts say that you can also save tax by purchasing a health insurance policy for yourself, including your family. Taxpayers can claim a deduction of up to Rs 25,000 for paying the health insurance premiums for themselves, including their spouses and children under Section 80D of the Income Tax Act. Under this section, senior citizens can claim a tax deduction of up to Rs 50,000. When you purchase health insurance for your parents, you can save another amount of Rs 50,000.
Also Read: Union Budget 2023: 5 Income Tax expectations of Salaried Employees
4. Pay Tax and File ITR on Time
As per the Income Tax rules, an individual or a company is required to file the ITR prior to the 31st of July or the date mentioned by the income tax department every year. A penalty is imposed when you are unable to file the income tax return as per the stated due date.
“Filing the income tax return within the mentioned last date is vital for other purposes also such as availing of a home loan applying for immigration documents, doing a transaction of higher value, etc. For saving tax, different people invest in tax-saving instruments at the end of a financial year. However, the effective time to invest in the tax-saving schemes would be at the start of the financial year,” says Jain.
5. Select Precise Tax Regime and Have a Corporate Structure
It is also important to select the precise tax regime. Currently, there are two types of tax regimes. While furnishing the return, one can opt for any one out of two.
According to Jain, appropriate tax regimes would be vital for securing the maximum tax savings. An offer for a lower tax rate is provided by the new tax regime but the same does not allow tax deductions. Therefore when one asks for tax deductions under Section 80C of the Income Tax Act, one should proceed with the older tax regime. If not, one can opt for a new tax regime for diminishing his income tax outgo.
Narang further underlined the importance of incorporating a corporate structure.
“As things stand, the tax rates for individual professionals or firms are significantly higher than the rates applicable to companies. It may make sense, in this light, to set up corporate structures, particularly in the case of professionals with an established practice. This decision should be weighed against the benefits of utilizing profits as an individual,” says Narang.
Also Read: How to stay tax compliant in 2023 and beyond
6. Manage Cash Flows and Maintain Proper Book of Accounts
Narang says that professionals who are subject to tax audits should maintain proper books of accounts in order to be able to substantiate their revenues and expenses before any tax authorities. Failure to do so can result in additional tax payments, as well as interest and penalties.
Further, it is also important for working professionals to manage their cash flows.
“Exceeding the INR 50 lakh threshold means that professionals are no longer entitled to the benefits of section 44ADA. Those professionals whose fees are close to this threshold may want to manage their cash flows in a manner that avoids breaching the threshold, if possible,” says Narang.