Tax planning is part of the financial discipline. One should get it right at the beginning of the financial year. It ensures peace of mind and saves you from last-minute hassles at the end of a year, resulting in inadequate tax-saving and stress.

 

The government encourages taxpayers to make certain long-term investments that allow rebates under various sections of the Income Tax Act. Individuals should utilise this facility to cut down on their tax outgo every financial year. Though not mandatory, it is advisable to use this facility which serves two benefits — fewer taxes and long-term investments.

 

 

 

Figure out which tax slab you fall into with your income. Taxes are levied on individuals' tax slabs, which means tax rates are different at various levels of income. If your taxable income post deductions are up to Rs 5 lakh, you are not required to pay any taxes. However, beyond this, you will be liable to pay taxes ranging from 5% to as high as 30% along with the applicable cess. In short, tax rates rise with an increase in income.

 

Once you know your tax slab, you will have a fair idea about the taxes you would pay in the current financial year. For instance, if your taxable income is Rs. 5 lakh per annum, your tax outflow will stand at Rs. 12,500 in the old as well as new tax regime. Further, if your income falls between Rs. 5 lakh and Rs. 7.5 lakh, you may have to cough out an extra Rs. 25,000 as taxes taking it to a total of Rs. 37,500. And if your taxable earning is between Rs. 7.5 lakh and Rs. 10 lakh, you will pay Rs. 62,500 (old regime) and Rs. 75,500 (new regime) as income tax.

 

Therefore, first and foremost, evaluate your tax-saving requirement based on your income and future growth. This will help you draw a roadmap for tax saving initiatives in the new financial year.

 

 

Before you invest in new tax-saving instruments, have a quick look at your existing tax-saving investments. This would help you ascertain the scope for further reduction in taxes by increasing your investments. It needs to be considered that given the maximum permissible limit available under various I-T sections, one can't reduce tax outflow beyond a point. Sections like 80C (maximum investment Rs 1.5 lakh per annum), 80CCD (additional deduction of Rs 50,000 by investing in NPS) and 80D (maximum deduction allowed Rs 1 lakh under medical insurance) are widely used to reduce income tax.

 

 

The maximum permissible tax investment limit is Rs. 2 lakh, and in some cases, it may reach Rs. 2.5 lakh. So, even if you exhaust your permissible limit and go beyond it, your extra investment in tax saving investments won't qualify for the tax rebate. Here are the top five tax-saving instruments you may opt for:

 

A) Public Provident Fund (PPF): It falls under Section 80C and has a permissible investment limit of Rs 1.5 lakh. You can invest in PPF in various tranches throughout the year or by investing in one-time investments. The PPF scheme comes with a lock-in period of 15 years. The interest earned through PPF is tax-free.

 

B) Tax Saving Mutual Funds: Commonly known as equity-linked savings schemes or ELSS, these market-linked investments also qualify under I-T Sec 80C. ELSS comes with a lock-in period of three years. You can invest in ELSS, either by monthly SIP or lump sum mode. Returns earned are subject to taxation when units are redeemed and attract a long-term gain tax of 10% on gains over and above Rs. 1 lakh.

 

C) NPS: One can opt for NPS under Section 80CCD and claim tax deduction of up to Rs. 2 lakh — Rs 1.5 lakh under Section CCD (1) and an additional Rs. 50,000 under Section CCD (1B).

 

D) Insurance: Premium paid for health and life can be used for a tax deduction. However, do not discontinue your life insurance policy or take up a new one to meet tax-saving targets. The idea of buying insurance is to purchase financial protection for yourself and your family. So your insurance shopping should be based on your family's health needs.

 

E) Tax-saving FDs: If you are a conservative investor, you invest in tax-saver fixed deposits, which come with a lock-in period of five years with a fixed interest rate. Investment in tax-saver FDs helps you get a deduction under Section 80C. The interest earned is taxable as per your applicable tax slab. Additionally, banks deduct tax at source if the interest earned is over Rs. 40,000 in a financial year.

 

 

 

It is advisable to spread your investments in tax savings instruments across the year with significant contributions in the first two quarters. NPS and EPF may take care of your monthly investments. In addition to it, you can consider having a SIP in tax-saving investment mutual funds, while in PPF, you can make a regular monthly investment. Such a systematic approach will not burden you in the last quarter of the fiscal year.

 

Tax planning keeps your investment on track and reduces the tax burden to an extent. But most individuals make the mistake of making tax savings their investment goal. Your investment goal should be based on your financial goal, risk profile and income. And if your investment helps you meet your tax-saving goal, it is an added advantage. There is no compulsion on you to invest in tax saving instruments. It is a facility provided to help you get tax rebates that help create long-term growth.