It's tax time now: How to plan for a tension-free life

Where taxes need to be paid, taxes need to be saved. Some forms of income attract lower taxes than others. Some income is tax-free. Some income is fully taxable. Other incomes fall between these two extremes. Tax planning is critical to save money and accomplishing your financial goals. It is crucial to plan your finances strategically to optimise tax savings and maximise your take-home income.

Tax planning also helps you to achieve your financial goals by reducing your tax liability and freeing up more money to invest. This can help you to build a stronger financial foundation and to build more assets for the future.

Old Vs. New Tax Regime

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New tax regime is default tax regime whereas the older tax will be available to those who specifically opt for it. The new tax regime does not offer as many deductions and exemptions as the old tax regime. For most people under Rs. 7.5 lakh, it makes sense to opt for new tax regime and pay no tax.

Assess the Latest Tax Slabs and Rates

By knowing the applicable rates, you can structure your income and investments accordingly.

For example, the Finance Minister Nirmala Sitharaman announced in this year’s budget that under the new tax regime the rebate for income tax has been increased to Rs.7 lakh from the earlier limit of up to Rs.5 lakh. Other changes were also introduced under the tax slab for the new tax regime too. Apart from that surcharge rate on income of Rs.5 crore and above has been decreased from 37% to 25%. You must know the implementation of these changes on your income and tax liabilities.

Leverage Tax Deductions and Exemptions

Take full advantage of the available tax deductions and exemptions under the Income Tax Act. Consider popular deductions such as Section 80C (for investments in instruments like PPF, EPF, and tax-saving mutual funds), Section 80D (for health insurance premiums), and Section 24(b) (for home loan interest). Identify the maximum allowable limits and invest accordingly to optimise your tax savings.

Explore Tax-Saving Investments

Opt for tax-saving financial instruments such as the Public Provident Fund (PPF), Sukanya Samridhi Yojana (SSY), Senior Citizens Savings Scheme (SCSS), Life and Health Insurance, Tax Saving Mutual Funds etc. These investments not only offer tax benefits under Section 80C but also provide an opportunity for long-term wealth creation. Consider the lock-in periods, returns, and risks associated with each investment option to make informed decisions.

Consider Equity-Linked Savings Scheme (ELSS)

ELSS is a tax-saving mutual fund that offers the potential for capital appreciation along with tax benefits under Section 80C. By investing in ELSS, you can potentially save taxes and participate in the growth of the equity market. However, be mindful of the risks involved and consult with a financial advisor to align your investments with your risk appetite.

Avail Home Loan Benefits

If you have a home loan, ensure you utilize the tax benefits associated with it. Claim deductions on the principal amount (Section 80C) and interest paid (Section 24(b)). Additionally, if you are a first-time homebuyer, you may be eligible for an additional deduction under Section 80EEA. Analyse the tax implications and consult a tax professional to make the most of these provisions.

You can save Rs 1.5 lakh under Section 80C for the principal payment of your home loan, and on interest you can claim Rs 2 lakh under section 24B. Additional Rs 50,000 can be saved if the loan amount is Rs 35 lakh or less.

On stamp duty you can claim Rs 1.5 lakh under 80C and under 80EEA another Rs 1.5 lakh if the loan is taken between April 1 2019 to 31 March 2022.

Plan for Long-Term Capital Gains

When dealing with capital gains, be mindful of the holding periods to determine whether they are short-term or long-term. Long-term capital gains on equity investments may be taxed differently. Consider strategies such as tax harvesting or investing in tax-efficient mutual funds to minimise your tax liability.

Effective tax planning is essential for savings and increasing take-home income. By understanding the latest tax slabs, leveraging deductions, exploring tax-saving investments, and utilising home loan benefits, individuals can effectively save income tax and channel those savings towards their financial goals.

Adhil Shetty is the CEO ofBankbazaar.com