Income tax planning is one of the important measures for financial planning as the main objective is to reduce tax liability and save more. As the deadline of March 31, 2024, marks the end of financial year FY23-24, now is the opportune moment to engage in tax-saving investments that can translate into more disposable income.
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However, hasty, last-minute decisions can potentially lead to errors.
Here's how to plan taxes while sidestepping common pitfalls:
Estimate income tax liability
Before delving into tax-saving investments, it's paramount for taxpayers to estimate their tax liability.
This involves factoring in unavoidable investments or payments eligible for tax deductions, such as EPF contributions, repayment of home loan principal and interest, NPS contributions within the salary package, term insurance plans, and HRA deductions.
This measure helps prevent over- or under-investment, ensuring a balanced approach.
Adopt a long-term investment approach
Rather than adopting a piecemeal approach to tax-saving investments, financial experts advocate aligning these endeavours with long-term financial goals.
By combining the dual benefits of tax savings and long-term financial growth, individuals can make their money work more efficiently for them.
Identify the income tax regime
Salaried individuals should carefully assess which tax regime — old or new — best suits their financial profile.
To optimise tax management, investors should calculate their tax liability under both regimes and opt for the one resulting in the least tax outflow.
With the new tax regime becoming the default option in Union Budget 2023, understanding the implications of this shift is essential for informed decision-making.
Making investment in tax saving avenues
Closing the gap on residual tax liability can be achieved through voluntary investments eligible for tax deductions under various sections of the Income Tax Act.
These encompass investments in ELSS, NPS, ULIPs, VPF, PPF, and other small savings schemes qualifying for Section 80C deductions.
Additional deductions, such as those under Section 80CCD (1B) for NPS investments and Section 80GG for individuals living on rent without HRA, offer further opportunities to optimise tax savings.
Make informed investments with proper planning
An often overlooked aspect of tax planning is the consideration of the rate of return on investments.
While the return on investments like PPF and FDs is readily available, investments with fluctuating values, such as ELSS and ULIPs, require more careful scrutiny.
Before making commitments, experts recommend evaluating whether the returns from these investments are competitive when compared with alternative options.
