“Income tax is the hardest thing in the world to understand.”
This saying by Albert Einstein is true in every sense of the word. After all, planning your taxes can be a “taxing exercise”. But the good news is, if you plan your taxes efficiently, it can save not only your time but also your money in the long run.
Most importantly, along with helping you reduce your tax liability, smart tax planning can also help achieve your financial goals. Truth be told, tax planning can be done easily; you just need to follow the ways we have talked about in this article:
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Calculate Your Taxable Income In Advance
Most individuals begin tax planning when the due date for settling income tax return is fast approaching. However, it is encouraged that you start your tax planning earlier as it gives you more time to make a good estimate of your income and gains.
One easy way to calculate your tax liability is to print the previous year’s return and write your estimate of current year’s numbers. This can be a ballpark estimate, and once you write the new numbers, you can use them to estimate your taxable income and then determine what tax bracket your income falls into.
For instance, if your last year’s taxable income was Rs. 7 lakhs and if you are estimating a 15% growth in your net income this year, then your taxable income will also increase in similar proportion.
Moreover, calculating your tax liability well in advance will enable you to know how much you need to invest to save tax.
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Plan Your Investments
To reduce your tax liability, you can take advantage of various tax deductions and exemptions. For instance, if your taxable income is expected to be Rs. 8 lakhs at the end of the financial year, then you can start investing in tax-saving investments.
From a tax planning standpoint, there are several tax-saving options offering deductions under Sections 80C, Sections 80D, etc. Additionally, expenses like interest paid on the home loan, repayment of the principal amount of a home loan, tuition fees for children can be claimed as a deduction from the gross taxable income thereby reducing your tax liability.
You can take advantage of Section 80C of the IT Act by investing in tax-saving investments like ELSS, PPF, NSC, and so forth. However, the most efficient way to take advantage of this section is to invest in term insurance and Unit-linked insurance plans (ULIPs). Here’s why:
Along with offering financial security to your loved ones in your absence, term insurance offers tax benefits as follows:
- Premiums paid are tax-deductible up to a maximum of Rs. 1,50,000
- Death benefits are entirely tax-free
ULIPs, on the other hand, offer dual benefits of insurance and investment. So, if you are looking to fulfill your goals like children’s higher education, house purchase, or retirement, ULIPs can help you create the desired corpus by offering higher returns over the longer run. Moreover, life insurers like Max Life Insurance offer ULIP plans with benefits such as:
- In-built life cover
- Multiple fund options
- Flexibility to choose premium payment term
- Switching facility
ULIPs too offer tax benefits u/s 80C for premiums paid in the given financial year. But, most importantly, the returns and the maturity benefits that you receive are completely tax-free u/s 10 (10D).
Remember that early planning of investments will give you more time to select the most efficient option, which can give you higher returns, more liquidity, and most importantly, will help you to accomplish your goals in a better way.
Keep All Tax-Related Documents Safely
For the smooth tax filing process, all your tax-related documents ought to be kept securely. If you are spending on things for which you can claim deductions, like medical bills and travel bills, keep receipts of all such transactions handy.
This won’t just accelerate your filing process, yet additionally, diminish the odds of missed details and errors.
File Income Tax Returns Well In Advance
To avoid any mistakes, it is best to file your income tax returns well before the due date as any mistake might result in a notice from the IT department. Moreover, procrastinating tax-filing till the last minute could also create problems, especially in case of transactional glitches or technical errors.
Therefore, file your tax in advance and be prepared with all relevant documents like salary slips, eligible deductions, and investment documents to ensure a smooth filing process.
Stay Away From Eleventh-Hour Hasty Tax Decisions
Beginning with tax planning early will allow you to think better and make wise decisions with respect to investments. Remember that choosing the right tax-saving investments can not only help you reduce your tax liability but also meet your set financial goals.
