Useful Tips on Tax-Planning in India

If you are the new toddler on the block, while talking about taxes or if you are not sure about how to reign in your money to save tax, read on and learn about the useful tips on tax-planning. We are here to assist you to make a wise choice.Looking for safer options for investments? Or are you a game for investment along with a slight risk factor? Do not knock over! We are here to help! We will tell you about the useful tips to save tax.

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When the fiscal year comes to an end, it comes with the last-minute running around to make investments related to taxes. From this phase, the employees of the companies have to undergo wringer by the department of accounts of companies. The employees are asked to declare their tax saving investments, and consequently entailing the proof of the investment made by the employees. And if the employees drag their feet and leave their investments for the last 3-4 months of a fiscal year undergo lots of financial pressure. You can avoid such situations by beginning the income tax-planning right when the fiscal year starts.

What is Tax-Planning?

The analysis of your financial state from point of view of tax efficiency in order to plan your finances in the most optimised way is referred to as Tax-planning. Tax planning lets the payer of the tax put the various tax deductions, benefits and exemptions to best use so as to minimise the tax liability over a fiscal year. Tax planning is an authorised and lawful method of reduction of income liabilities; however, you must be cautious to make sure that the taxpayer is not intentionally making a fuss of tax avoidance or tax evasion.

Tax Planning in India:

There are several tax-saving options available for taxpayers in India. These options offer a wide range of deductions and exemptions, which help in putting a limitation to the overall liability of tax. The deductions are offered from Sections 80C to 80U and the eligible taxpayers can claim it. These deductions are made against the quantum of tax liability. There are several other sections of the Income Tax Act 1961, which can lessen your liabilities of tax like tax credits and exemptions.

Tip on Tax-Savings:

Keeping your goals and objectives in mind:

You already are aware of the fact that tax-saving is imperative, and investments made by you for the purpose of saving tax must assist you to move closer to your financial objectives. In other words, your tax planning must dovetail with your fiscal planning. Therefore, before you put your money in a tax-saving product, question yourself:

Which of the financial goals will be fulfilled with the help of this tool? Does it go well with the asset allotment that is perfect for you, depending on your risk appetite and investment perspective? Does the lock-in period suits you or causes a liquidity munch? Is the balance between risk and reward favourable in this tool?

Taking care of Risk Appetite:

Equity Linked Savings Scheme (ELSS) has qualified for Section 80C deduction and is best suited for the individuals who are capable of bearing the instability of the equities. ELSS also has the smallest lock-in period, a mere three years, amongst all the tax-saving instruments. In order to harvest the growth advantage of equities, leave behind your funds invested in the ELSS scheme even after the lock-in ends.

Pick the Right Instrument:

There are several instruments that qualify for the deduction of taxes under Section 80C of Income Tax Act, 1961. A few of them are life insurance premiums, five-year bank FDs, National Pension Scheme (NPS) contributions, National Savings Certificate (NSC), etc.

Each and every product mentioned above has different features. National Pension Scheme, commonly called NPS, is a long-term product. The fundamental investment in NPS can be either debt or equities. While retiring, 40% of the withdrawal is tax-free and 40 percent should be annuitized. Although NPS is a low-cost product (as the charges for fund management are extremely low), a lot of people find the tax on the final corpus and the obligatory annuitisation exasperating. If this is what you think, bound your investment in NPS to gain Rs. 50, 000 deduction under Section 80CCD (1B).

Life Insurance is an alternate to the long-term product, which qualifies for Section 80C benefit. Tax is not levied on the proceeds from maturity. Life insurance policies are the product that is mostly mis-sold throughout the season of tax, and here, where people mainly go wrong. Once you make a wrong decision, it is difficult to come out of it or solve it. If you are investing in a traditional product, you may find that the life insurance cover you receive is not sufficient and the return is also low (as these products put in the money in debt paper). Unit-Linked Insurance Plans (ULIPs) are better instruments for investment now after the supervisory body has condensed the charges that can be levied by the insurance companies. In spite of this, ULIPs come with a five-year lock-in period. If there is an underperformance of the ULIP’s fund, then you can only switch from one fund of the same insurance company to another. If you have invested in a product of insurance, you must choose a term insurance plan and it will be a wise decision.

Please check Best Retirement Plans India

Despite the fact that investment made for tax-saving is imperative, it must not turn out to be an end-goal; however, lend a hand so that you move closer to your fiscal goals. Beginning with this early will let you think better and make wise decisions in this matter.

If you are an early bird, then you can the following:

  • Ignore eleventh-hour hasty decisions
  • Planning well and choosing insurance products that help you meet your set goals
  • Maintenance of asset allocation and make investments basis risk profile
  • Make payment of life and health insurance premiums on monthly or quarterly basis
  • Distribute your investments over 12 months and reduce your burden in the last months.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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