5 tips for the perfect tax planning in 2021
Tax payments take up a considerable percentage of every person’s savings, which can happen more when one is not aware of tax planning.
In the process of tax planning, several steps are taken that involve decreasing one’s liabilities and tax payments. The process is entirely legal and can be a challenge for novices.
It is essential to understand the concepts of tax planning to take the best advantage out of it. So, let’s see the benefits of tax planning in a nutshell-
- Stable Economy- One can save much of their savings organically and directly when tax management is done correctly.
- More Productivity-Through proper planning, a person can convert tax funds into income-generating sources. Generally, this happens through investing in projects and shares.
- Fewer Liability-The most significant way to decrease the liability that comes with earning is to invest in various funds like long-term equity funds and mutual funds.
- Less Litigation-Litigation is the process through which one can decrease tax payouts through various legal procedures.
3 steps of tax planning
Before one starts with the process of tax planning, it is essential to know about the steps that one needs to take-
- Calculate the total income-This involves calculating the possible sources of one’s income.
- Calculating the taxable income-The income that would include the income that would be taken as tax by the government.
- The slab of Tax- The amount of tax that needs to pay-
- 2,50,000/- No Tax
- 5,00,000/- to 7,50,000/- 12,500/- and 10% of the amount which is more than Rs.5,00,000/-
- 7,50,000/- to 10,00,000/- 37,500/- and 15% of the amount that is more than Rs. 7,50,000/-
- 10,00,000/- to 12,50,000/- 75,000/- and 20% of the amount that is more than Rs. 10,00,000/-
- Above 15,00,001/- 1,87,500/- and 30% of the amount that is more than 15,00,000
The categories are also termed as tax brackets, and one can lower the payable tax by claiming a tax exemption for house rent allowance and travel allowance, and many more.
5 tips to save tax
- Investing in Mutual Funds
Mutual Funds investments are probably one of the most generic ways for reducing taxable income. This especially happens while one invests in Equity Linked Savings Scheme (ELSS), which receives tax deductions based on Section 80C.
The lock-in period is of 3 years which is lower than similar tax savings options like Private Provident Funds and Bank Fixed deposits which have a lock-in period of almost 8 years.
There is an imposition of tax on these funds, and research claimed that one could save up to Rs. 46,000/- by participating in the scheme that provides the highest returns comparatively.
- Saving tax through philanthropic activities
Donating to charity has a fair share of tax deductions. This is a way to encourage donations to charities and other philanthropic activities. The tax deduction includes making National Relief Funds.
- Investing in ULIPs
Unit Link Insurance Plans (ULIPs) are unique insurance plans that are tax-saving options. These plans are one of the hybrids for life insurance and investments.
As one invests in ULIPs, a portion goes for a life insurance plan, and the rest becomes a part of an equity-based fund. This way, one can avail the benefits of both the options availing tax exemptions and returns, making this one of the best tax-saving options.
- Tax reduction on salaries
The tax deduction applies to an individual’s assets that are not permanent. I suppose a person is paying home rent for the house they live in at that moment; then they can apply for tax deduction under Section 10(13A). So, they can leverage a tax deduction, but they need to show the receipts.
HRA is a tax-saving scheme coming from the employer. The calculation happens by subtracting 10% of the salary from the actual rent. If a person lives in a metro city, they are eligible for a 50% tax deduction, and 40% is eligible for people living in other cities.
- Taking the benefits of Section 80
The most common cause people avail themselves this for a tax deduction. This section claims that any individual is applying for a tax deduction if their salary is under 1,50,000 annually. Also, a person can claim a higher tax deduction if they invest in National Pension Scheme Account.
The Nation Pension Scheme, also known as NPS, is a pension scheme that encourages corporate workers to invest in pension after retirement. One receives a good return as the return rate is around 12%.
To sum above the above facts
It is imperative to have good tax planning in 2021 as this can help people save a large amount of their savings.
One can avail the ways mentioned above and steps to save their tax and become financially stable legally.
Following the steps and having the best Tax planning is one of the most acceptable ways to keep your finances balanced and growing.