Income Tax Planning is a way to plan your savings for the financial year. It is the way in which you can prevent the portion of the income from being drained. The year-end or the beginning of the new financial year brings turbulence in financial planning. It is the time when you are actually tax planning because you have to file income tax returns. The government of India has levied rules for individuals and businesses to save tax legally in compliance with section 80C of the Income Tax Act.
Tax planning is to reduce the tax liability on the taxpayers. If you have not planned your tax liabilities till now and are looking for solutions to save tax as the year 2021 is here to an end. It is time to pay the taxes but doing that with tax planning strategies will be the correct way.
Let us understand these tax planning strategies one by one. But before that, it is important to understand what is tax planning strategy?
What is a tax planning strategy?
The tax planning strategy is to work out all the possibilities in order to work out the least amount of taxes. You need to plan taxes to save for your future via investment plans. These investment tools bring you the best returns when you invest for a long period of time.
When you plan for tax savings, there are different sections under the Income Tax Act that help you to save conveniently.
Tax Savings under Section 80C of Income Tax Act:
The most common section under which individuals claim for tax deduction is Section 80C of the Income Tax Act, 1961. The maximum deduction which is allowed under this Section is Rs.1.5 lakhs every year from the total income. There are different sub-section of 80C that include 80CCC, 80CCD (1), 80CCD (1b) and 80 CCD (2).
To utilize the benefit of section 80C, you can pick any of these tax-saving investments:
|Investment Tool||Interest||Guaranteed Returns||Lock-In Period|
|Equity Linked Saving Scheme (ELSS)||12-15%||No||3 years|
|Public Provident Fund||7.1%||Yes||15 years|
|National Savings Certificate||6.8%||Yes||5 years|
|National Pension Scheme||8% to 10% in equity-related investment||Yes||Till Retirement|
|ULIP Plan||12% to 14% on equity-related investments||Yes||5 years|
|Fixed Deposits||3% to 6%||Yes||5 years|
These are the investment options that include a life insurance policy also. Depending on your requirement, you can purchase or invest. A life insurance policy is, however, preferred most of the time as it gives life protection to the life insured. The policy benefits the dependent family members by paying them the sum assured. The claim under life cover enables the families to take care of their expenses and future goals.
To the life insured or the policyholder, the benefit is major tax savings only.
Tax Savings Investment under Section 80CCD of Income Tax:
The sub-section 80CCD of section 80C makes your investment eligible for deduction under Income Tax Act, 1961.
- Under section 80CCD (1)maximum deduction allowed is :
- Employee’s contribution, that is, 10% of salary in case the taxpayer is an employee.
- 20% of total gross income in the case of self-employed.
- Rs.1.5 lakh limit allowed under Section 80C.
- Additional deduction of Rs.50,000 is allowed under Section 80CCD (1b) for the amount you deposit in an NPS account.
- The employer’s contribution under section 80CCD (2) is allowed for deduction up to 10% of basic salary plus dearness allowance under this section. This benefit is allowed only to salaried individuals and not self-employed persons.
Tax Savings Investment under Section 80D:
To claim income tax benefits under Section 80D, you can buy a health insurance policy. You as a person can get a tax deduction of Rs.25,000 if you pay an insurance premium for yourself, your spouse, and your dependent children under section 80D.
If your parents are under 60 years old, you can get an additional deduction for their insurance up to Rs 25,000. If both parents are above 60 years old, the deduction amount for the premium paid for parents is Rs 50,000. And if all the individuals covered under the policy are above 60 years, then tax exemption will be Rs. 50,000 for each (self, spouse, and dependent parents). The maximum deduction permitted under this clause is Rs.1 lakh if both the taxpayer and the parent(s) are 60 years old or older.
Example to understand the effect of buying tax-saving investments under Section 80C, 80CCD, and 80 D.
For example, Rohit had a salary of Rs.10,00,000/-. He purchased a ULIP plan for which the total investment made was Rs.1.5 lakhs. Other than this, Rohit got a tax benefit under Section 80CCD as he made an additional contribution of Rs.50,000 under NPS. Rohit paid a mediclaim premium of Rs.25,000/-for himself. The total taxable income for Rohit will be:
|ULIP Premium Invested||Rs.1,50,000|
|Contribution to NPS||Rs.50,000|
|Total taxable income||Rs.7,75,000/-|
Can deductions under Section 80C and 80CCD be made together?
Section 80CCD falls under Section 80C. The deduction claimed under Section 80CCD cannot be claimed under Section 80C. In combination, the overall limit of deduction under Section 80C, 80CCC, and 80CCD is Rs.1.5 lakhs. Additional deduction of Rs.50,000 is allowed under Section 80CCD if a contribution is made to the National Pension Scheme.
Proper information and knowledge about tax saving investment can help you save money. You can invest the saved money and generate income out of it. If you use proper investment tools, you can get maximum deductions up to Rs.1,50,000/- from the total taxable income under Section 80C of Income Tax. Invest in tools or life insurance policies that suffice your purpose also. For more information on tax saving, you can consult your tax advisor or read about income tax.