Income tax can be a confusing subject especially when you are at the start of your professional life. But not planning your taxes will only lead to you losing your hard-earned money. Taxes can be saved very easily, and more savings strengthen the financial foundation of your life. Here’s a primer to help you get started on making full use of your available tax benefits.
Assess your tax liability
The first step is to assess your net tax liability after all your available tax deductions. For this, refer to your salary slip, speak to your accountant, or use any online tax calculator. From this year onwards, for instance, there is a standard deduction of Rs 40,000 for all. You may further reduce your tax liability through employer-provided meal coupons, LTA, EPF, and House Rent Allowance. After those deductions, if your taxable income is more than Rs 2,50,000 a year, you will be liable to pay income tax to the extent set in the income tax slab you’re in.
Tax-saving & investing
Next, you must understand that not all investments and insurance are tax-saving instruments. For example, an equity mutual fund SIP is an investment but won’t provide income tax deductions. However, an ELSS mutual fund SIP will. You need to buy tax-savers only to the extent of your taxes. You can invest the rest of your savings in any non-tax-saving instruments as per your needs. For example, your taxable income comes to Rs 3,50,000. You are in the 5% tax slab, and your actual tax liability prior to any tax savings would be Rs 2,600. This amount can be saved through a tax-saving investment. Investing more than this amount will not earn you additional deductions.
Start with Section 80C
Section 80C is the most popular tax-saving section, allowing you a plethora of options to save taxes by investing up to Rs 1.5 lakh per annum. You can choose from a mix of life insurance, ELSS mutual funds, Public Provident Fund, National Savings Certificates, home loans, and tax-saving five-year fixed deposits to meet your tax-saving goal. In your 20s, start off with a term insurance plan. You can buy a cover of Rs 50 lakh for annual premiums starting from Rs 3574. Two: If you’re not averse to risk and seek a high rate of return (10% or more in the long term), combine wealth creation with tax saving by starting an SIP in an ELSS fund. Three: If you’re risk averse, invest via a PPF account where you currently earn guaranteed returns of 7.6% per annum.
Education loan tax benefit
Use your education loan for tax deductions. The loan is eligible for deductions even if the higher studies were pursued abroad. However, the deduction is available only for the interest paid on the education loan and not the principal. Note that the tax benefit is available for seven subsequent years from starting the interest repayment or till the period when entire interest is cleared, whichever is earlier.
Get health insurance
It is a must-have instrument in your financial portfolio. You may not visualise yourself on a hospital bed while you’re in your prime. However, a sudden illness, an accident, or a serious health condition may drain off your savings very quickly. Since you’re young, start off with a basic cover of Rs 5 lakh for which annual premiums start from Rs 4,567. However, you can claim tax deductions under Section 80D up to Rs 25,000 for health insurance for yourself, and an additional Rs 25,000 for health insurance for your parents (Rs 50,000 if either parent is above 60).