SMART STRATEGIES TO SAVE TAX LEGALLY  AND

 BUILD WEALTH EFFECTIVELY

Paying taxes is a civic responsibility, but that does not mean you should not take advantage of legal avenues to reduce you tax liabilities. If you are a salaried person by understanding and utilizing various deductions, exemptions and tax saving investments can minimize your taxable income.

In this blog I provide you a comprehensive guide to help you to understand how you can legally reduce your tax liability.

1.         Understand the basics of Income tax : Before diving into strategies , it’s essential to understand how income tax is calculated. Your taxable income is derived by subtracting eligible deduction and exemptions from your gross income. The key is to minimize taxable income while complying with tax laws.

For example : Suppose Mr. A is a salaried person and  annual salary of Mr. A is Rupees 8,00,000. He Paid yearly premium for LIC is Rupees 15,000 , paid for Health insurance premium of Rupees 25000 yearly , invest in PPF of Rupees 25,000 yearly . His tax liability is calculated as follows :

Income from Salary                  Rs. 8,00,000

Less: Standard deduction             Rs. 50,000

Net income                               Rs. 7,50,000

Less : Deduction under chapter VIA

      Under section 80C

      LIC premium      Rs. 15,000

      PPF                   Rs. 25,000    Rs. 40,000

      Under section 80D

      Health insurance                    Rs. 25,000

      Premium

Total deduction                           Rs. 65,000

Taxable income                          Rs. 6,85,000

Tax liability under old tax regime :

Tax on (5,00,000-2,50,000)*5%        Rs. 12,500

Tax on (6,85,000-5,00,000)*20%       Rs. 37,000

  Total                                               Rs. 49,500

Add:  cess@4%                                 Rs. 1980

Total tax liability                                Rs. 51,480

 

2.        Maximize deduction under section 80C :

Under section 80C of the Income Tax Act,1961 you can claim deduction of up to Rupees 1,50,000(Rupees one lakh fifty thousand) annually. Following instruments are come under this section :

1.         Public provident fund (PPF) - Invest in PPF is tax free. You can invest in this instrument up to Rupees 1,50,000(Rupees one lakh fifty thousand) annually and you can claim deductions for Public provident fund under section 80C of the Income tax act , 1961.

2.         Employees provident fund (EPF) - Contribution made to EPF is eligible for deduction under section 80C of the Income Tax Act,1961.

3.         Equity-linked saving scheme (ELSS) - It is a type of tax savings mutual fund with the potential of high returns, but it has high market risk.

4.         Life insurance premiums: Premiums paid for life insurance are also eligible for deduction under section 80C of the Income Tax Act,1961. You can claim up to Rupees 1,50,000(one lakh fifty thousand) annually.

5.         Principal payment on home loan : If you have a home loan , the annual principal portion of your EMIs is eligible for deduction under section 80C of the Income Tax Act,1961.

3.         Take advantage of section 80D: Section 80D allows deductions for premium paid for health insurance premiums. You can claim deductions as follows:

You can  claim deduction for self and family up to Rupees 25,000 and claim deduction for senior citizen is up to Rupees 50,000 .

You can also claim up to Rupees 5,000 for preventive health checkup under section 80D of the Income Tax Act , 1961 .

4.         House Rent Allowance: It is beneficial for salaried persons. If you stay in rented house, you can claim exemption for Hose Rent Allowance. The amount exempted is the least of the following:

a)         Actual HRA received

b)         Rent paid minus 10% of your basic salary.

c)         50% of basic salary (for metro cities) or 40% of basic salary for non-metro cities.

For claim HRA you have to maintain rent receipts or rent agreement for proof.

5.         Utilized the standard deduction: It is an additional benefit for salaried person. Every salaried individual is entitled for a standard deduction of Rupees 50,000 from their gross salary. This deduction is automatically accounted for by employers while calculating taxable income.

6.         Leave travel allowance (LTA): Leave travel allowance (LTA) is another benefit for salaried individual. You can claim exemptions for travelling expenses incurred on domestic trips. But this does not include food, accommodation or other expenses.

7.         Interest on home loan (section 24(b)): If you have a home loan then you can claim deduction up to Rupees 2,00,000 for interest paid for self-occupied properties.

8.         opt for New Tax Regime if suitable : From the financial year 2020-2021 , taxpayers can choose between old tax regime ( with deductions and exemptions )  and new tax regime (with lower tax rate but no deductions and exemptions ) . Before choose the tax regime you have to calculate your tax liability under both regime (old tax regime and new tax regime), after that decide which regime is best for you. Choose correct tax regime can save your money. So, choose the tax regime carefully.

9.         Use section 80E for education loan: If you have taken an education loan for yourself, your spouse or children , the interest paid is fully deductible under section 80E of the Income Tax Act 1961.

10.    Use section 80G for Donations: Contribution to approved charitable organizations and funds can be claimed under section 80G of the Income Tax Act , 1961 .

11.    Save on taxes through perquisites: Many employers provide tax free perquisites, such as,

a)         meal coupons

b)         If company provide vehicle for official purposes.

c)         Reimbursement for telephone and internet expenses.

12.    National pension system (NPS): If you invest in National Pension System (NPS), you can claim deduction under section 80CCD(1B).

13.    Claim work from home allowances: Post pandemic, many companies offer allowances for work from home expenses like electricity, internet and furniture. Ensure that you claim these allowances as they might be partially or fully tax exempted.

14.    File returns timely to avoid penalties: File your income tax return within due date to avoid late fees under section 234F and ensure you can claim all applicable deductions.

15.    Maintain proper documentation: Always maintain records of investments, expenses other documents required to claim deductions and exemptions. This includes:

a)         Rent receipts

b)         Insurance policy documents

c)         Proof of donations.

Proper documents ensure smooth processing of your tax return and prevent scrutiny.

16.    Plan taxes through the year: Instead of waiting until the financial year end, plan your tax saving investments and expenses in advance. This helps you make better financial decisions and avoid last minute rushes.

Conclusion: Reducing your tax liability legally is all about being proactive and well-informed. By leveraging deductions, exemptions with proper planning a  individual can save a substantial amount and by investing those amount they can grow their money and achieve your financial goals. Start to implementing these strategies today and take charge of your financial well-being. Remember, paying less tax legally is not just smart - it is empowering.