Creative Approaches to Tax Planning
When it comes to managing personal finances, applying specific strategies can offer tax relief and help save some money at the end of a financial year. The income tax system of India has several provisions in place that allow one to invest smartly and save tax at the same time. The money one redeems using specific tax-saving tips can later be utilised for personal goals and plans. However, the world of taxes can seem daunting to someone who has just started their financial journey. This is why, in this article, we will cover ways to reduce taxable income and explain everything in the simplest manner. Let us begin!
Understanding Taxable Income
Taxable income refers to the portion of an individual’s income that is subject to taxation by the government. It is calculated by subtracting allowable deductions and exemptions from gross income. Components of taxable income typically include wages, salaries, bonuses, tips, interest income, dividends, rental income, capital gains, and business income, among others. Understanding these components is crucial for accurately determining one’s tax liability.
- Wages and Salaries: Income earned from employment is one of the most common sources of taxable income.
- Interest and Dividends: Earnings from interest on savings accounts, bonds, and dividends from investments are generally taxable.
- Capital Gains: Profits from selling assets such as stocks, bonds, real estate, and collectables are subject to capital gains tax.
- Rental Income: Income generated from renting out property is considered taxable income.
- Business Income: Profits generated from self-employment, freelancing, or owning a business are taxable after deducting business expenses.
Gross income refers to an individual’s total earnings before any deductions or exemptions are applied. It includes all sources of income, such as wages, dividends, interest, and rental income. On the other hand, taxable income is the portion of gross income subject to taxation after allowable deductions and exemptions have been applied. Understanding this distinction is essential for accurately assessing tax liability and implementing strategies to minimise taxable income.
Tax Saving Tips for Individuals
Here are some ways to reduce taxable income that can applied by individuals in India who are looking to invest smartly this financial year:
Utilise Section 80C Deductions
Take advantage of Section 80C of the Income Tax Act, which allows for deductions up to Rs. 1.5 lakh from your taxable income. Invest in eligible instruments such as Public Provident Fund (PPF), Employee Provident Fund (EPF), Equity Linked Savings Schemes (ELSS), National Savings Certificate (NSC), and life insurance premiums to maximise tax savings.
Opt for Health Insurance
Invest in health insurance policies for yourself and your family members to avail deductions under Section 80D. You can claim deductions of up to Rs. 25,000 for premiums paid for yourself, your spouse, and dependent children. An additional deduction of up to Rs. 25,000 is available for premiums paid for your parents.
Contribute to the National Pension System (NPS)
Invest in the NPS to secure your retirement while enjoying tax benefits. Contributions to the NPS are eligible for deductions under Section 80CCD(1) of up to 10% of your salary (for salaried individuals) or gross income (for self-employed individuals), subject to a maximum of Rs. 1.5 lakh under Section 80CCE.
Claim House Rent Allowance (HRA)
If you are a salaried individual living in a rented accommodation, ensure you claim the House Rent Allowance (HRA) exemption under Section 10(13A) of the Income Tax Act. The exemption is available for the least of the actual HRA received, 50% of the salary (for those living in metro cities), or 40% of salary (for non-metro cities), and actual rent paid minus 10% of the salary.
Donate to Charitable Organisations
Contributions to eligible charitable institutions qualify for deductions under Section 80G of the Income Tax Act. Ensure that you donate to recognised institutions and obtain donation receipts to claim deductions ranging from 50% to 100% of the donated amount, depending on the organisation’s eligibility.
If you want to support children’s well-being, consider donating to Bal Raksha Bharat (also known as Save the Children). This NGO has been working in India for the past 15 years and has impacted the lives of more than 10 million children. Head to Save the Children India’s website and learn more about their work for children’s education, healthcare, nutrition, protection, and more.
The Way Forward
Implementing creative tax-saving tips is key to optimising tax outcomes and achieving financial goals. However, staying informed about tax law changes is essential to continually adapting and optimising tax strategies. Tax laws are dynamic and subject to frequent revisions, making it important for individuals to stay updated on relevant changes that may impact their tax planning efforts. Individuals can ensure ongoing tax optimisation and financial well-being by staying informed and seeking professional advice when necessary.