Shivam, a salaried employee working with a top IT firm paid Rs. 2.5 lakhs as Income Tax in the last financial year.
What he didn’t realise was that he could have saved at least Rs. 65,000 in taxes, had he just planned them well and utilised the government’s provisions to claim tax deductions.
Like Shivam, there are a lot of salaried Indians who end up paying a high amount of tax due to a lack of tax planning. By the time they enter the month of March and have to submit investment proofs to their employer, they’ve already burnt through a lot of their income, and there’s hardly any money left to invest.
And that is where disciplined tax planning helps. Rather than wait for March to invest money and claim tax deductions, it is better to plan right now, in April, for the current financial year, so that we’re able to save maximum tax.
Here are some tips on how to plan your taxes and save prudently:
1. Section 80C: This section of the Income Tax Act allows individuals to reduce their taxable income by up to Rs. 1,50,000. This means that depending on your tax slab, you could save anywhere between Rs. 7,500 to Rs. 45,000 in tax by claiming these expenses. Some expenses that you can claim these deductions are Provident Fund contributions (Both EPF and PPF), Life Insurance policies, Tax saver FDs, ELSS etc. If you have children, their tuition fee expenses can also be claimed under Section 80C.
If you’re a young individual who has dependents financially and wants to grow their wealth, it is recommended to buy a Term Insurance policy so that your family is covered, and also do an SIP in an ELSS Mutual Fund (for good returns). A monthly SIP of Rs. 12,000 will more or less cover Section 80C completely, and make sure that you not just invest in a disciplined manner, but also save tax!
2. Section 80D: This section can help you reduce your taxable income by up to Rs. 75,000 by claiming expenses paid towards Health Insurance policies for yourself and/or your family. However, you should decide your insurance cover and premium amount based on your requirement, and not solely for tax saving.
If your parents are not covered, make sure you buy a policy for them first, because health risks increase with age. The good news is that if your parents are not covered by insurance but you spend money on their healthcare, this too can be claimed as a deduction under Section 80D
3. Section 80CCD (1B): You can invest in the National Pension System scheme and claim a deduction of up to Rs. 50,000 on your taxable income, thereby saving you anywhere between Rs. 2,500 and Rs. 15,000 in taxes. Now, the returns on NPS are relatively lower compared to ELSS funds, but it has its own advantages as well. You get the flexibility to choose the split between higher risk (equity) products and lower risk (debt, government bonds) as well as other products (REIT, AIF etc.).
NPS comes with a lock-in period till retirement, post which you can withdraw 60% of the accumulated corpus. The remaining 40% can be taken as an annuity (which is a fixed sum of money paid out each year). So while NPS can make a good retirement corpus, just make sure you invest in NPS only after going through the nitty-gritties.
4. Apart from the above 3, you can claim other deductions as well, such as the interest paid on your education loan, principle + interest paid on your home loan, etc.
In addition to these, employers also provide certain components which are fully or partially tax-exempt. So make sure that you discuss with your employer and opt for the relevant components. If you live in a rented apartment, HRA can help you save tax. If you travel a lot, make sure you opt for LTA so that you can save tax on that too!
Ankur Jhaveri is founder, Jackfruit.