Tax planning is one of the important measures for financial planning as the main objective is to reduce tax liability and save more. The lesser tax one has to pay, the more disposable income one has. As we all know that March 31 is the end of any financial year, so it is high time to make tax-saving investments to get more disposable income. However, in the last-minute rush, individuals can commit mistakes that could prove costly in the long term.
So, let's understand how to plan your taxes while avoiding these mistakes:
Estimate the tax liability
Firstly, taxpayers should estimate their tax liability after factoring in unavoidable investments or payments that qualify for a tax deduction, such as contribution towards EPF, repayment of home loan principal and interest repayments, NPS contribution as part of their salary package (if any), term insurance plans, tax deduction on HRA, etc.
This would allow them to avoid over-or under-spending/investing in tax saving options.
Invest with a long-term approach
Experts suggest individuals avoid taking a piecemeal approach while making tax-saving investments. Instead, they should align investments with long-term financial goals to derive the dual benefit of tax saving and wealth creation.
Salaried people should further identify
which tax regime is good for them (the old one or the new one). For better tax management, investors should calculate their tax liability under both tax regimes and opt for one involving the least tax outgo.
Budget 2020 introduced a new tax regime with a lower tax rate in the interest of those unable to avail of benefits under the older tax regime. However, this regime is optional.
Invest in voluntary investments eligible for tax deductions
The residual tax liability can be saved through various voluntary investments or payments eligible for tax deduction under various sections of the Income Tax Act. These include investments in ELSS, NPS, ULIPs, VPF, PPF and other small savings schemes qualifying for Section 80C deduction, an additional deduction for investments of up to Rs 50,000 in NPS under Section 80CCD (1B), deduction under Section 80GG for those living on rent but not receiving HRA, availing HRA exemption by paying rent to parents under Section 10(13A), etc.
Making investments with proper planning
The rate of return on investments like PPF and FDs is readily available on websites, advertisements, etc. But the rate of return on investments like ELSS, ULIP, etc., whose values fluctuate daily, is uncertain.
So, while making the investment in these, experts suggest that an individual must check whether their returns are quite enough if they are compared with the return on other investments.
