5 Tips for the Perfect Tax Planning in 2021
Would you like to earn more money? If you want to, then tax planning is for you. First of all, you save the expenditure on tax payments, then you get to put the saved amount in investment plans, that earn you more money of which several are tax-free in the bargain.
Tax planning in simple words means taking financial measures to decrease your tax liability. It is completely legal and even promoted by the government to encourage the saving habits of the populace. You can reduce your tax burden by availing of deductions, exemptions, and rebates permitted under the Income Tax Act. But the challenge is that the language used to formulate these loopholes or sections is full of financial and legal jargon and very difficult to understand.
To help you with this problem, we have explained in simple words some effective tax planning suggestions. Use these suggestions to reduce your tax burden and increase financial security in turn.
Steps of Tax Planning
Let us look at the basic information needed to start your tax planning journey.
Calculation of Total Annual Income
Calculate your total annual income. This includes income from salary, business, rental income, interest earned on deposits and saving schemes, capital gains income, cash gifts other than family members, or income gained from any other sources.
Calculation of Taxable Income
Calculating taxable income is essential for your investment and tax planning purposes. This would be the income on which you have to pay the income tax. Remove Rs 2.5 lakhs from your total annual income as tax liability on that amount is zero. Of the rest amount, remove tax-free incomes. For example, the interest generated on PPF accounts and interest up to Rs 10,000 on savings accounts, etc.
The Tax Slab
It means the amount of tax needed to pay as per the tax slab or tax bracket you come under. These slabs are given below.
- Up to Rs 2.5 lakhs – Zero tax liability. No tax to be paid.
- Up to Rs 5 lakhs – Rebate on the tax liability of Rs 12,500 under section 87A. No tax to be paid.
- Between Rs 5 lakhs to Rs 7.5 lakhs – Tax liability of Rs 12,500 and add 10% on amount more than 5 lakhs. Add these two and further include 4 percent health and educational cess on the total amount.
- Between Rs 7.5 lakhs to Rs 10 lakhs – Tax liability of Rs 37,500 and add 15% on the amount that is more than Rs. 7.5 lakhs. Add these two and further include 4 percent health and educational cess on the total amount.
- Between Rs 10 lakhs to Rs 12.5 lakhs – Tax liability of Rs 75,000 and add 20% on the amount that is more than Rs. 10 lakh. Add these two and further include 4 percent health and educational cess on the total amount.
- Above Rs 15 lakhs – Tax liability of Rs 1,87,500 and add 30% of the amount that is more than 15 lakhs. Add these two and further include 4 percent health and educational cess on the total amount.
Tips for Saving Tax
Let us check how to save tax under different sections of the Income Tax Act.
Utilizing Section 80C
The government of India allows deduction of up to Rs 1.5 lakh to be invested in specific saving schemes and instruments under Section 80C of the Income Tax Act. This is done to encourage the saving habits of Indian citizens. Some popular instruments you can invest in are as below.
- Public Provident Fund (PPF) accounts
- Equity Linked Saving Schemes
- 5-year tax-saving deposits
- Pension plans
- Life insurance policies
- ULIPS (Unit Liked Insurance Plans)- For meeting insurance and investment needs.
By investing in these schemes, you can save tax and meet your future financial goals.
Utilizing Section 80CCD(1B)
A great tax planning suggestion is to invest in National Pension Scheme (NPS). It lets you claim a deduction of Rs 50,000 under Section 80CCD(1B) of the Income Tax Act. It is up and above Rs 1.5 lakh deduction under Section 80C. Therefore, you can claim a deduction of up to Rs 2 lakhs under these 2 sections. NPS invests your money into several debts and equity funds and gives high returns. On maturing, you can get a portion of the amount as an annuity that is taxable, and the rest as regular payments.
Utilizing Section 80G
You can donate to your favorite charitable institutions and claim deductions up to 10 percent on your income under Section 80G of the Income Tax Act. But the institution should have an income-tax exemption certificate. Get a receipt of the donation and a copy of the income-tax exemption certificate for availing of the income tax deduction.
Utilizing Section 80D
How to do tax planning and get health insurance in the process? By utilizing Section 80D of the Income Tax Act. Under this section, you can claim a deduction of Rs 25,000 for availing of health insurance for yourself, your spouse, and your children. You can also claim a further deduction of Rs 25,000 for availing of medical insurance for your parents who are younger than 60 years. But, this does not include medical bills.
Utilizing Section 10(13A)/ Section 80GG
You can claim a deduction of House rent allowance (HRA) for paying rent on your residential premises under Section 10(13A) of the Income Tax Act if you are a salaried employee having HRA as a salary component. Self-employed can claim deduction on rent through Section 80GG of the Income Tax Act.
So, these are some tax planning suggestions for 2021. Use these suggestions to save tax legally and your hard-earned money and invest it for a secure financial future.
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