Every taxpayer seeks to save the income tax. It is possible through proper tax planning, even within the provisions of tax laws. It is an honest and a correct approach to reducing the tax liability by availing all permissible allowances, deductions, exemptions, etc. People are not fully aware of the rules of tax planning, and they only invest at the end of the financial year to reduce the tax burden, which is not a wise move. Tax planning aims for productive investments, which not only provides substantial relief from the taxation, but it also facilitates in maximizing the returns from the invested money.
As the rules are essential to keep the things on the right track, the golden rules of tax planning also play a significant role in reducing the tax liability.
Let us reiterate the 5 key rules of tax planning which will help you to reduce the tax outgo.
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1. Tip Spread Your Income among Family Members
If the entire income of the family belongs to only one member, there will be the higher tax liability than when the income is spread among members of the family. The first rule of tax planning is that every family member must have a source of income, so they will become an independent taxpayer and will help to reduce the overall tax liability. You may split the income generated out of the investments made, which otherwise would be added to your income.
Suppose, doing Rs 10 lakh of FD in your name @7% rate of interest will increase your annual taxable income by Rs 70,000 and tax with Rs 21,000/- (tax slab rate of 30%). By booking FD with the same amount for your parent whose income falls under a lower tax slab rate, you will be able to reduce the overall tax liability.
You may also transfer a productive asset to a family member who falls in lower tax slab than yours and take back assets which do not produce income. There are some other ideas to spread income with other family members such as give shares that will pay capital dividends, transfer growth asset to your kids, etc. All these options will help you to pay the lower tax.
2. Take advantage of Tax Deductions
There are various tax deductions available under the Income Tax Act. You can avail the full benefit of tax deductions for every member of the family. You can prepare a list of tax deductions available such as:
- Section 80C deductions: Premium on life insurance policy, PPF account, national savings certificate, repayment of principal on home loan, etc.
- 80D deductions: Payment of premium for medical insurance.
- Section 24: Interest levied on a home loan.
- Section 80E: Tax deduction for interest paid on education loan.
Be sure to take the optimum benefit of available tax deductions, which will help you to reduce the taxable income and thereby, pay lesser tax.
3. Avail Tax Exemptions
It is important to claim all exemptions, as permissible under the Income Tax Act, 1961. The income tax law provides multiple tax exemptions under section 10 of the Income Tax Act. You & your family members must focus on proper investment planning, so you can claim the optimum benefit of tax exemptions.
The proceeds of a life insurance policy, the amount received as a gratuity, leave encashment, payments received from provident fund, leave travel allowance, agricultural income, etc. can be availed as tax exemptions.
4. Take note of Tax-Exempted Income
There are kinds of incomes which are tax exempted, under the Income Tax Act. Incomes such as receipt of inherit money as a member of Hindu Undivided Family, interest earned on savings account (up to Rs 10,000), income from gratuity, amount received under voluntary retirement, scholarships and rewards are tax exempted. You may invest in a way that generates tax-exempt income and will help you to reduce the overall tax liability.
5. Keep it Simple
The tax planning should be easy, simple and hassle-free. You should go for tax planning with an objective of saving tax while making investments that offer returns as well. You are advised to estimate your expected taxable income at the beginning of a financial year that will help you to find ways to reduce the tax liability by investing in tax saving instruments. You must also keep all the tax-related documents safely that will be required as proof for claiming eligible tax deductions.
In Nutshell,
Paying income tax is a legal obligation of every citizen of the country. The tax laws are designed in a manner that no unnecessary taxes are levied on the tax payers. Saving tax is legally permissible under the Income Tax Act and by doing tax planning, timely and properly, it is realistic for you to save on your taxes. It is also advised to declare your income and investments correctly and don’t forget to file the income tax return within the stipulated time, to avoid the tax penalties.