esm7i You may have just started your career or be planning to file your very first tax return in the coming year. You’re not the only one! Each April, a new fiscal calendar year begins. With it comes new opportunities for better tax planning and financial decisions.
It is easy to eliminate the clamor I hear from some of my friends every year about finding ways to save on taxes.
In the next five minutes, I will explain the basics of income tax. By the end, you’ll have a much better understanding of how you can plan your taxes. Let’s walk together.
Understanding Income Tax: Exemptions and Deductions explained
Income tax is a tax that you pay on your income. The government is stealing a piece of your pie by dipping its hands into your pocket. You pay more tax the more you earn. The money is used for public services such as schools and hospitals. So, in essence, you are paying for your education and healthcare whether you want to or not. Rates and rules can vary depending on where you live. Therefore, it’s a good idea to contact your local tax authority.
The different income tax slabs are the tax rates applicable to different income levels. The government determines these rates, which vary from country to country. Tax rates are generally higher the more income you earn.
Tax exemptions and deductions allow taxpayers to reduce their taxable income and thus lower the tax that they must pay. They can include:
Standard deduction: Salaried people can make a fixed deduction on their gross salaries. It is currently Rs. In India, the average annual salary is Rs.
Section 80C deductions: These include investments in Public Provident Funds (PPF), Equity-Linked Savings Schemes (ELSS), National Pension System(NPS), and life insurance policies up to a limit of Rs. The maximum deduction is Rs. 1.5 lakhs per annum.
Section 80D includes the deductions for premiums paid on health insurance for yourself, your spouse, your children, and your parents.
Interest on home loans can be deducted up to Rs. In India, you can deduct up to Rs.
Education expenses include tuition fees for children’s education.
Taxpayers should be aware of the tax exemptions and deductions available to them to reduce their tax liabilities and maximize their savings.
New regime vs. old regime: What’s changed
In 2020, a new tax regime will be introduced. Taxpayers can choose the one they want to use. It’s important to know the differences between the two before choosing the system to file your tax returns.
The new regime has more tax slabs and lower tax rates. Almost all income tax exemptions in the previous regime (ironically now called the old regime) do not apply. Once you have decided, it is impossible to change the tax regime for the current financial year. It’s best to compare both regimes with online calculators before deciding.
What’s the best choice
Your gross annual income and tax-saving strategies are the only factors determining which option is best for you. Two years ago, when I faced this decision, I calculated my net taxable earnings. This was done by subtracting Rs.50K from my gross income. The 50K exemption and other exemptions such as HRA, LTA, and voluntary investments (LIC, PF ELSS NPS, etc.) are included. Section 80C deductions are available for voluntary investments (LIC, PF, ELSS, NPS, etc.) ).
After doing this, I ran another set of calculations with the new tax slabs without any deductions allowed. You can also use online calculators if manual calculations don’t appeal to you. You should be able to determine the tax liabilities in both scenarios. This table will help you with your calculations.
In my particular case, I maximize my Sec 80C deductions (limit of Rs 1.5 Lakh). I also claim HRA deductions as per the allowed limit. I will miss these deductions and increase my taxable income and net tax by choosing the new tax system. Naturally, I’ve stuck with my old tax system.
What is this advance tax some people pay
You will have to pay advance tax if you earn more than Rs10,000 in a financial year but don’t have a regular salary. Rent from a property, interest on savings or fixed deposit accounts, and capital gains from the sale of mutual fund shares are all examples.
It is a simple calculation since there are no external factors involved. You only need to perform one simple calculation.
Estimate your annual earnings from sources other than salary, as described above.
Add the combined income to your gross salary.
Calculate the tax using the income tax slabs of the old or the new regime, depending on your choice.
Subtract the TDS already deducted and any other deductions made for income tax (in the previous regime) from this amount.
If you have a delta greater than Rs.10,000, you must pay advance tax if the delta amount exceeds Rs. The deadline to pay 100% of the advance tax is usually the 15th of March each year. In this case, a penalty of 1% per calendar month is charged until the amount due is paid.
The process of paying an advance is relatively simple. You can do it conveniently at the Income Tax website, saving you late fees and penalties.
What are some tips for tax planning
As I mentioned, the new tax system doesn’t provide many deductions. If I want to save tax, I will need to maximize deductions. In all fairness, I think it’s better to stick with the old tax regime. This allows me to maximize the following deductions.
The HRA is for the rent that I pay for the house.
Section 80C deductions up to a maximum of Rs. 1.5L, including life insurance premium, ULIP, ELSS, PF, ELSS, et al.
Section 80CCD deductions up to a maximum of Rs. Contribution to voluntary NPS of up to Rs.
Section 80D Deductions up to Rs. Medical insurance for yourself and your dependents is 25K. Additional Rs. Senior citizens can get up to 50K.
Tax planning is not rocket science. It is only necessary to carefully consider your annual income and thoroughly research the available tax-saving tools. You should pay attention to the length of your investment horizon and risk appetite. Do not let your desire to save taxes drive you to lock up a large portion of your savings for long periods. This will prevent you from achieving your short- and mid-term goals.
