You work very hard to earn every penny. Therefore, it makes sense that you find the best tax saving plan that you can save a substantial chunk of the tax outflow. Though avoiding tax is difficult (take Tax Deducted at Source for example), there are number of strategies that you can use to minimize the taxes and increase your savings.
If you feel that you have been paying a large part of your income in taxes, then it is possible that you have not planned your taxes very well. There are many ways to save money on taxes, secure your future, and increase your wealth, all by designing the best tax saving plan.
This article will give you a step-by-step to select the right tax saving options in the process of tax planning.
- Understand Your Tax Saving Goals
How many times have you made rush investments in financial products because you wanted to avoid paying taxes at the end of the financial year? The best way to plan your tax saving investments is in the beginning of the financial year and not at the end of it. Besides, it takes a lot of consideration and evaluation of future goals to develop the best tax saving plan.
One of the most crucial aspects about tax planning is that your tax saving should be planned without impacting your financial life. For instance, do not take a home loan just because you want to claim the tax saving on its interest component. Instead, you should use your ongoing home loan payments to save some tax burden by claiming the deductions. Similarly, other tax saving options should only be added to your financial portfolio if they help you reach your future goals such as life insurance, child’s plan, and retirement plans, to name a few.
- Assess Your Risk Appetite
The key to building the best tax saving plan is to diversify your portfolio based on your risk appetite. Your investment goals will evolve constantly. Therefore, your portfolio should also change according to the market scenarios to benefit from the changing times. There are many tax saving options, such as Unit Linked Insurance Plans, that are market-linked products with an insurance component to help you in wealth creation as well as safeguard your family’s financial future.
However, before you invest in these instruments, it is important to understand the market risks as well as your appetite for it. If you want to invest in low risk tax saving options, then you must look at investments like Public Provident Fund (PPF) that is one product that many people consider low risk. Since PPF has a long tenure of 15 years, you can earn a huge-tax free interest due to power of compounding.
Therefore, you need to assess your risk appetite before adding an investment product to your financial portfolio.
- Maximise Deductions Under Section 80C
As per section 80C of the Indian Income Tax, you can save up to Rs. 1.5L from your annual income by investing in various financial products. Your best tax saving plan will be the one that allows you to maximize these deductions and also leverage from these investments in the long run.
This is where life insurance policies come in. It is one of the best tax saving options where you save taxes on the premium payments as well as maturity benefits.
However, the tax benefits of Rs 1.5 lakh can only be claimed if the premium is less than 10% of the sum assured and the policy is taken after 1st April 2012. For policy before this timeframe, you can only claim deductions if your premium payments do not exceed 20% of the sum assured.
Some of the popular instruments that fall under this section include Public Provident Fund, Unit Linked Insurance Plan, National Security Certificate, and Pension Plans, to name a few.
But before you buy a life insurance plan or any other financial instrument, you must compare them online and make sure they meet your needs. Online insurance plans offered by reputed insurers like Max Life Insurance allow you to review and select policies as per their benefits with regards to payable premium. Remember to find the products that provide you maximum benefits with minimum investment.
- Invest in Tax Saving Instruments Beyond 80C
As a taxpayer, you can take advantage of Section 80C of the Income Tax Act. However, there are many other tax saving opportunities that can further reduce your tax liability. Some of them are mentioned below:
- National Pension Scheme Under Section 80CCD (1B): You can save up to Rs. 50,000 in NPS. This tax deduction can be claimed over and above the Rs 1.5 lakh applicable under section 80C. This combination can take your total tax savings to up to Rs. 2 Lakhs.
- Health Insurance Premiums under Section 80D: You can claim tax deductions for health insurance premiums from your total taxable income towards the payment of premiums as per section 80D. The limit of the deduction under this section will depend on the people covered under health insurance and their age.
- Repayment of Education Loan Under Section 80E: If you have taken an education loan to pay for your child’s education, then you can get a tax rebate on the interest component of that loan under Section 80E of the Income Tax Act. This benefit can be either claimed by the student or the parent, depending who repays the loan.
- Interest Repaid on Home Loan Under Section 24: As ahomeowner, you can avail the tax benefits on the interest component of your home loan under Section 24 of the Income Tax Act. The maximum deduction permissible for a self-occupied property is up to Rs. 2 Lakhs.
There are many more such tax saving options that can help you save your taxes legally and increase your income to help you expand your investments as well as future wealth.