Income Tax planning - beginners guide

"What is income tax?", Once I asked a wise man.

"It is something which can make you feel proud and frustrated both at the same time" he replied with a huge laughter, "Proud because you feel like you contributed something for growth of your Nation and frustrating because it is taking your hard earned money out from your pocket"

Joking apart, many of us must have gone through this at least once; when compared our first job offer with actual monthly salary or when we received our annual incentive letter vs the actual amount credited. The surprising, unforeseen deduction column was - Income Tax. If you could relate with this, you are reading the exact article which you need to.

Here in India, we have very much simple taxation model in place. If you invest minimum 4-5 hours of time in understanding it, you can perfectly play your side of role in it. This year onward, they've introduced a new tax regime and kept it as an option to choose; but after some straight forward calculations, it does not make much sense. Hence we'll consider and discuss the old tax regime and try to evaluate how much tax you can 'save' and how to plan for it right from the beginning of the year.

One thing you need to understand is, saving tax does not mean doing some illegal activities and hide you income. The government itself, encourage citizens to invest their money (up to certain limits) in some genuine instruments which is treated as tax-free. Once you learn how much is the limit and what are those instruments, you can easily plan and invest your money in those and enjoy its perks in form of return on the investment as well as tax saving on it.

There are different sections under which you can show your investments and claim tax deduction on yearly basis. In this article, we'll discuss some very common methods which provides you with tax deduction facility as an individual.

To start with, lets take Section 80C. Under this section you can claim up to ₹ 1.5 lakh per year. If you invest more than that, the additional money will be considered taxable no matter in which instrument you invest it. So this gives you the first tip for your tax planning:

• Under section 80C you can invest maximum ₹12500 per month (If you earn enough and your monthly budget allows you to take this much amount aside) No need to invest more than that.

Now what all instruments are allowed to enable tax deduction under 80C? There are many more, but I've listed down a few popular instruments along with the expected return percentage, lock-in period and the risk associated.

As per your financial risk calculator suggestions, you can decide which instrument can be a best fit for you.

Are these investments only options to save tax under 80C? No. The certain types of payments you make are also eligible for tax saving under this section.

- Life Insurance Premium

- Repayment of Home loan (principal amount)

- Children's tuition fee

But remember overall bucket is ₹ 1.5 lakh per year. So, in case your home loan EMI has principal amount more than ₹ 1.5 lakh/year, you DO NOT need any of the above mentioned investments for tax saving purpose. This one section alone can give you tax relief under section 80C.

Then there is section 80CCD(1b) which allows you to save ₹ 50 thousand/year by investing in National Pension Scheme and this is over and above the ₹ 1.5 lakh covered under section 80C. As it is a 'pension' scheme lock-in period is till retirement.

Apart from these there are few more deductions you can avail. In most of the cases, one can not avail all of them. Below is the list for reference, you can research with these section names if it's applicable to you:

10 (13A) - House Rent Allowance

80E - Education loan interest payment

80EE - Home loan interest payment for first time home-owners

80D - Health insurance premiums (e.g. Top-up bought on company-provided insurance cover)

80DD - Expenses on a handicapped dependent

80DDB - Treatment of specified illnesses

80G - Donations to approved charitable institutes

80TTA - Saving account interest

80U - Handicapped tax-payers can claim this deduction

To help with the most common tax saving options such as 80C, 80 CCD(1b) and HRA, I've prepared a spreadsheet which can help you to plan you 'tax saving investments' as per your monthly budget. It is an another extension to the sheet provided in earlier article - Investment Guide for beginners.

Monthly_Salary_Planning_v1.0.3_Tax.xlsx

Download XLSX • 28KB

Hope this is useful to you and you will be more confident this year onward while dealing with your income tax planning.

#income_tax #tax_saving