Want to Be A Tax-Saving Genius? Follow these Tips

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What is the first thought that comes to mind when you hear the word tax? Is it confusion? Fear? Last-minute panic investments?

What if someone told you that you no longer have to worry about losing a significant chunk of your salary to taxes? 

You may not know this, but several tax saving options can help you save your take-home salary. It is almost as if you are giving yourself a raise! 

The best way to start tax saving is to assess your income outflows that can have an impact on your tax. Has your salary increased? Did you change your professional recently? Did you take a home loan? Think of all the events in your life that may have a tax impact and use that to build a portfolio of tax saving options. 

Similarly, you should also keep an eye out for the budget changes that may have an impact on your financial plan. 

Once you have taken note of all these points, you should use the following tips to develop a portfolio of tax saving options that will help you increase your investments, expand your wealth, and also enhance your take-home salary! 

Excited? Read on to know more! 

  • Start Tax Planning Early Into the Financial Year

If you often plan your tax savings at the last minute just to save some money at the end of each financial year, then you are not alone. Many people make the same mistake every year and either end up paying higher taxes or create an impractical investment plan that is difficult to sustain in the long run. 

That being said, the best way to start tax planning is at the beginning of the financial year. When you start early, you not only save tax but choose your tax saving options wisely that is best suited to your financial goals and needs. 

If you want to optimize your tax planning efforts, then you must understand the Section 80C of the Income Tax Act. This the most relevant section that allows you to choose the right instruments for your portfolio that are geared towards securing your finances in the long run, help you in wealth creation, and also save you tax in the process. 

  • Invest in Life Insurance

Life insurance is considered as one of the best tax saving instruments available in the market today. However, it is essential for you not to buy life insurance solely to save tax. It is an integral part of your investment portfolio and must be purchased by assessing your family’s needs and other such factors. 

However, when you do invest, all the premiums paid on life insurance policies, including Unit Linked Insurance Plans (ULIPs), are eligible for tax deduction under section 80C of the Income Tax Act. You can avail tax benefit of a maximum of Rs. 1.5L per annum under this section. The life insurance plans help you save taxes on policies taken for yourself, your spouse, or your dependent children.

Online term insurance plans from reputable insurers such as Max Life Insurance allow you to review, compare, and select policies that offer you maximum benefit at low premiums on various type of taxes. These plans are easy to purchase and save you lots of money in taxes. 

  • Choose Wisely Between New and Old Tax Regime

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Budget 2020 has proposed a New Tax Regime that will applyto the existing one. However, the new one is optional. Simply put, you can choose between the two tax regimes depending upon your tax planning. 

If you have income under Rs, fifteen lakhs, then you can benefit under the New Tax Regime as you will have to pay lower taxes. However, you would also have to give up all the exemptions and deductions under the Income Tax Act, 1961. 

This means that if you choose to get taxed under the new regime, then you would have to forgo exemptions like House Rent Allowance, deductions under Section 80, such as 80C, 80CCC, 80CCD, 80D, and more. Even the standard deductions under Section 16, which is currently set at Rs. 50,000 available to salaried people, as well as a deduction on home loan interest as per Section 24(b) of the Income Tax Act, will be disallowed. 

Since the new tax system is optional and not enforced, it is advisable to get taxed under the old regime if you are a high-income earner with a robust investment plan. 

  • Diversify your Investment Portfolio

When choosing the best tax saving options, make sure your portfolio is made up of low-risk investments such as Public Provident Fund, National Savings Certificate, and Bank Fixed Deposits. You can also include high risk, equity-oriented investments such as Unit Linked Insurance Plans that give you a dual benefit of saving and investment. Some equity-based investments offer high returns in the long run. So if you have 8-10 years to invest, then diversify your portfolio with these options to not only save tax but also create wealth for the future. 

  • Optimize all your Tax Saving Options

As a taxpayer, you can benefit from several deductions and not just the ones mentioned in Section 80C of the Income Tax Act. For instance, you can claim deductions from health insurance premiums, home loan repayment, tuition fees of up to two children, donations, and treatment of certain illnesses. 

You can also claim deductions up to Rs. 25,000 per annum for your health insurance premiums under Section 80D of the Income Tax Act. Any donations made to charitable trusts and funds are also exempt under Section 80G of the Income Tax Act. 

Once you are equipped with all this information, it gets easier to incorporate the tax saving instruments to build an efficient portfolio of investments.