Last updated on October 8th, 2024 at 12:28 pm
In India, a percentage of us need to pay a share of our income to the government. This is known as income tax. These funds are used for administrative and development purposes.
Taxpayers are always looking for opportunities to reduce their tax liability. Tax planning is necessary if you are looking for ways to optimise and reduce your tax burdens legally. It will help you improve your financial health and add to your savings.
But what is tax planning and how can you save on taxes while remaining legally correct? In this blog, we’ll talk about different ways in which you save taxes and also share some tax-saving investment options.
What is tax planning?
It is a process of planning your finances in a way that reduces your tax liability while remaining compliant with tax laws. It involves analysing your income, expenses, investments, and other relevant financial areas to identify opportunities and strategies.
The goal of this process is to reduce your tax liabilities by optimally using tax rebates, exemptions, and benefits. With smart tax planning strategies 2024, you can:
- Reduce overall tax liability
- Increase savings and investments
- Accomplish long-term financial goals
- Comply with tax laws and avoid penalties
Top 10 tax savings instruments and strategies
There are several instruments that you can use to your advantage to maximise tax savings. Here is a list of some of the most popular tax-saving strategies:
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PPF
The Public Provident Fund (PPF) is a popular investment tool for tax savings. To start, you need to open an account PPF account at either your nearest bank or at the post office. Contributions to this account earn you a guaranteed rate of interest. Under Section 80C, you can claim up to Rs.1.5 lakhs of tax deduction in a financial year.
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Life insurance plan
It is a great tool for not only tax exemptions but also securing your family’s future. Policyholders are provided tax benefits on the premiums paid. Just like a PPF, a life insurance plan under Section 80C offers up to Rs.1.5 lakhs of deduction.
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Fixed deposits
Tax saver fixed deposits can fetch your tax deductions under Section 80C. You can claim up to Rs.1.5 lakhs of deduction. Such FDs have a lock-in period of 5 years. However, TDS applies to the interest earned. The interest rate generally ranges between 5.5% to 7.75%.
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ULIP
Unit-linked insurance plans are long-term investment options that allow you to choose debt funds, equity funds, or both. You have the freedom to switch between funds according to your financial goals. Investing in ULIPs allows you to save taxes under Sections 10(10D) and 80C.
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Senior Citizen Savings Schemes
The SCSS is a tax-saving tool specifically designed for senior citizens. It offers tax benefits under Section 80C of up to Rs. 1.5 lakhs. Senior citizens invest in this scheme and their investments are deducted from their taxable incomes. This helps to reduce their overall tax liability.
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National Saving Certificate (NSC)
It is a fixed deposit scheme offered only by the post office. One advantage of NSC over bank fixed deposits is that it offers higher returns for tax saving options under Section 80C. It also has a lock-in period of a minimum of 5 years. The longer the period you invest, the higher returns and tax benefits you will earn.
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New pension scheme
Any Indian citizen between the age group of 18 to 60 can participate in this scheme. It has a low-cost structure and is flexible, making it a popular tax-saving instrument. In this scheme, you need to invest at least Rs. 6000 annually - paid either totally or in instalments throughout the year. You can claim benefits up to Rs. 1.5 lakh under Section 80C.
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Tax-saving mutual funds
Also called Equity Linked Savings Scheme (ELSS), these mutual funds qualify for tax benefits. Such mutual funds invest in stock markets and are ideal for investors with medium to high-risk appetites. Investments towards this scheme are covered under Section 80C up to a maximum of Rs. 1.5 lakhs.
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Health insurance
These medi-claims offer tax benefits under Section 80D. Senior citizens get tax benefits for insurance premiums of up to Rs. 20,000 and others are offered Rs.15,000.
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Capital guarantee plans
These tax-saving investment options return your initial capital at maturity, offering financial security. This low-risk investment option returns around 9 to 15% p.a. You can claim tax benefits under Section 80C and 10(10D).
Tips to effectively save tax bills
Most people are not aware of areas where they can claim tax benefits. Here are a few tax tips 2024 to reduce your tax liabilities:
- You can tax benefits of a home loan of up to Rs. 1.5 lakhs on the principal amount and Rs. 2 lakhs on the interest paid.
- Invest in NPS and EPF for retirement. Investment increases your deduction under Section 80C.
- For a maximum of Rs. 10,000 in your savings account, interest earned is tax-free.
- NRIs who have an NRE bank account get interest on their fixed deposit amounts which is tax-free income.
Summing up
Every year, paying taxes takes up a large chunk of your income. Hence, taxpayers are always searching for options to legally reduce their tax liability. You can maximise tax savings using the tax management tools and strategies listed above.
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Frequently Asked Questions
Why should I plan my taxes?
Planning your taxes efficiently can help you contribute to your retirement plans, make tax deductions, and take advantage of tax credits. You can claim tax returns while being legally correct.
What are some types of tax planning methods?
Even though the goal of the process is straightforward, there are many ways you can approach it. Some popular tax planning methods are - purposive tax planning, structural tax planning, permissive tax planning, etc.
