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Tax Planning Strategies for Saving Money On Income Tax in India

Fri Apr 14 2023

Many individuals are unaware of how to reduce their income tax liability through smart financial planning. Of course, as responsible citizens, it is natural to fulfill your tax obligations. However, did you know that you could make confident decisions that would aid in reducing your tax burdens?

If you're looking for practical ways to minimise your income tax liability. We understand the importance of innovative tax planning and have put together expert advice to help you save on your taxes. By implementing the following tips and tricks, you can make your hard-earned money work smarter and reduce your tax obligation.

So, continue reading to learn how to reduce your ITR filing amount and keep more of your income.

How to Claim Tax Benefits from the Deducted Amount?

Understanding the intricacies of the tax system and how to claim tax benefits from the deducted amount is crucial. One such option is to allow your employer to deduct tax every month. However, it is imperative to keep a tab on these deductions and ensure they do not exceed your expenses on non-taxable payments.

If your deductions exceed your expenses, you can claim a refund from the Government. Therefore, you must notify the tax department of such transactions by filing your Income Tax Return (ITR). ITR is a formal document that outlines your income and tax deductions for a specific financial year.

To claim tax benefits, you must have all the necessary documents in place. This includes Form 16, which is issued by your employer and provides a summary of your tax deductions and other relevant receipts and bills. It is also critical to note that various tax benefits are available for different types of investments, such as insurance, mutual funds, and pension schemes.

Let us find out about them in the details below.

What is the Most Effective Way to Save Tax?

The Indian Government has consistently encouraged citizens to invest in various tax-saving instruments outlined in Section 80C of the Income Tax Act. By utilising these savings schemes, individuals can significantly reduce their tax liabilities while simultaneously building a portfolio of investments.

Investing in such tax-saving instruments can help individuals ensure financial stability without worrying about paying excessive taxes. As a result, it can be wise to take advantage of these opportunities to optimise personal financial planning.

Find below the details of some of the efficient options that you can use to save money; save taxes:

1. Life insurance

Life insurance is an essential financial tool that provides coverage and financial security to you and your family in case of an untimely death or injury and offers tax-saving benefits. By investing in a life insurance policy, you can make regular premium payments, which are accumulated and paid back to you in a lump sum when the policy term expires or in the event of the insured person's unfortunate demise.

Under the Income Tax Act of Section 80C, premiums on life insurance policies are eligible for tax deductions up to INR 1.5 lakhs per year. This means that the amount paid towards the life insurance premium is subtracted from your total gross income, which in turn reduces your tax liability.

2. Fixed Deposits that Save Taxes

It is noteworthy that investing your funds in fixed deposits can not only help you earn attractive interest but also enable you to save a considerable amount on taxes. This is because fixed deposits are a secure and reliable investment option that can offer tax-saving benefits to investors.

As a tax-saving investment, fixed deposits provide investors with a way to park their funds for a fixed period, usually ranging up to a few years. Typically the interest on fixed deposits is taxed; however, investors are eligible to claim a deduction under Income Tax Act Section 80C, 1961.

Furthermore, fixed deposits are an ideal investment option for risk-averse investors seeking to earn a fixed rate of return while preserving their capital. In addition, they are an excellent way to diversify an investor's portfolio, given their guaranteed returns and ease of liquidity.

3. Interest Earned from Savings Account

Another strategy to minimise taxes is maintaining funds in a savings account, as the interest earned up to Rs. 10,000 is exempt from taxes. This amount can significantly contribute to your overall savings. However, it is essential to note that this exemption applies only to interest income and not any other income type.

Moreover, senior citizens can benefit from an increased cap of Rs. 50,000 under section 80TTB, providing them a higher exemption limit for the interest income earned from their savings accounts. Notably, this benefit applies only to senior citizens and not to any other age group.

It is important to remember that while savings accounts are an excellent tool for earning interest income, the interest rates can vary depending on the bank or financial institution. Therefore, it is advisable to research and compare different savings accounts to identify the most competitive interest rates and the best benefits.

4. Mutual Funds

Equity Linked Savings Schemes (ELSS) are a popular investment option among investors seeking tax benefits. ELSS has the lowest lock-in period of 3 years, making it a preferred choice for long-term investment plans. Compared to fixed deposits and PPFs, ELSS has a shorter lock-in period, providing investors with more liquidity options.

One of the significant benefits of investing in ELSS is the potential to receive substantial returns on investment. This is because ELSS invests predominantly in equity shares of companies, which can generate higher returns over the long term. Moreover, ELSS investments are subject to market risks, which makes it essential to have a diversified portfolio to mitigate risks and maximise returns.

It is important to note that ELSS investments are subject to market fluctuations, and investors should have a long-term investment horizon to reap the benefits of this investment option. Additionally, ELSS investments offer tax benefits under Income Tax Act Section 80C, which allows for tax deductions up to Rs. 1.5 lakhs.

5. ULIPs

Unit Linked Insurance Plans (ULIPs) is an innovative investment instrument that combines insurance and investment in a single plan. As a result, ULIPs offer investors the dual benefits of protection and investment, making them an attractive investment option.

Investments made through ULIPs are eligible for tax deductions, which adds to their appeal. Moreover, they offer investors an opportunity to grow their wealth while saving on taxes. With the potential for high returns and the flexibility to choose from a variety of investment options, ULIPs have become a popular investment choice among savvy investors.

It is essential to note that ULIPs are linked to the market and are subject to market risks. However, they offer the advantage of investment diversification, which can help minimise risk. ULIPs also allow investors to switch between investment options based on their risk appetite and goals.

Final Thoughts

Tax planning is a crucial aspect of financial management for individuals and businesses in India. One can implement various tax planning strategies to save money on income tax, such as investing in tax-saving instruments, taking advantage of tax deductions and exemptions, and strategically planning investments. However, it is essential to note that tax planning should always be done legally and ethically, and taxpayers should ensure they are fully aware of India's tax laws and regulations.

Do not forget to keep coming back to TaxNodes to learn more about tax planning and other financial management topics to achieve your financial goals.


Rhea Tripathy

byRhea Tripathy

Meet Rhea Tripathy, a word wizard with a pen in one hand and a paintbrush in the other. By day, she slays as a content writer and by night, she indulges in her artistic passion. With a keen eye for the markets and a knack for literature, this certified trader brings her sharp mind and creative flair to everything she does. When she's not crafting clever content, you'll find her analyzing the latest market trends or getting lost in a good book.

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