How To Save Money On Your Income Tax This Year: 9 Tips For Professionals And Salaried Persons
Tax planning, in simple terms, is nothing other than organizing the income to avail the deductions or rebates to bring down the tax liabilities legally. Though it sounds easy, it is one of the hardest to follow through. The best way to tackle it is to plan early to avoid the disadvantages caused by the last-minute hurry and hassle. Remember the wise old saying that it is an early bird that catches a worm!
The tax planning differs for a salaried professional and a business person. One has a consistent income while the other is erratic. The tax deductions or rebates available to a business affect the tax planning of its owner. Similarly, some factors affect the tax planning of a salaried person. Still, the primary objectives of tax planning are the same for both income types. They are:
- Reducing the tax liabilities
- Improving the economic stability
- Investing efficiently
- Contributing to economic growth
- Minimizing the tax litigations
So, despite the many disparities, there are some common tax planning tips for both self-employed and salaried. These first productive steps help in formulating effective tax planning for both types.
Some common tips for self-employed and salaried for income tax planning
There is no single solution for income tax planning. It depends on several factors like income amount, investment aptitudes, risk-taking appetite, etc. The below tips will help in giving an initial kickstart to effective tax planning.
List the major financial decisions for the coming year
It is pertinent to list down major financial decisions planned for the year to get a clear picture of the financial goals. Tax planning is not just an activity but a financial goal for either of the income types. So, listing the major financial decisions like buying a machine for manufacturing, buying a house, or taking an educational loan contributes to the income tax planning for the year.
Understanding the income in detail to plan income tax
Another area of importance is to know in detail what contributes to the income. The cost to the company (CTC) includes the contribution to the provident fund and others, which plays a substantial part in effective tax planning. Similarly, the taxable income for a business owner depends on the type of business. The taxation for a sole proprietorship differs from a one-person company (OPC), which is again different from a partnership firm. It is essential to know the income in detail.
Learning about the various investment options
Investments are the magic mantra of income tax planning. The wise way to approach investments is to set a financial goal, understand the returns on investment, and match the best investment to the objective. Yet again, the choice of investments must cater to the short-term and long-term financial goals. All these are possible with a thorough understanding of the various investments.
Avoid the general tax planning mistake of procrastination
Tax planning, for many, is a last-minute tax evasion technique. In such cases, investments happen without any particular goal. As explained earlier, tax planning is sorting the income efficiently to bring down the tax liabilities by investing wisely. So, it is a tax efficiency technique. Procrastination is a mistake as there will not be enough time to coordinate matters efficiently.
Seek an expert help
Taxation is an expert’s job. Even Albert Einstein, one of the most intelligent people the world has ever seen, had famously said that there is nothing harder than income tax. A tax expert will be the right guide in setting the financial goals and matching the investments.
Some extra tips for business professionals for income tax planning
Below are some extra tips of priority, which will come in handy for business professionals.
Proper recording of cash expenses
There will be many petty daily cash expenses that may add up to a substantial amount in businesses. The computing of taxable income includes these cash expenses. Taxation requires a record of every expenditure. So, it is better to record every cash expense for better tax computation.
Depreciation is a part of tax computation, but section 35AD of the Income Tax Act provides additional depreciation for specified businesses. That means a business listed in this section can avail of extra depreciation. Such tax benefits are a source of encouragement to the business sector.
Some extra tips for salaried employees for income tax planning
There are two types of tax regimes available- the traditional and the new concessional tax rate. The new tax regime allows renouncing all deductions and opting for a single tax rate. For individual taxpayers opting for the traditional tax regime, one major tip for salaried employees is organizing their income starting with section 80C and proceeding to other sections like 80D, 80E, or 80G.
Section 80C is of primary importance
To avail of the deductions under this section, the requirement is to invest up to INR 1,50,000 in specific instruments like Employee’s Provident Fund (EPF), Equity Linked Savings Scheme (ELSS) Funds, National Savings Certificate, etc.
The possibilities of other sections to be explored
Some of the other important income tax sections are:
- 80D- for the medical insurance premium paid
- 80E- for the interest taken on higher education loan
- 80G- for donations to charities
It is commonplace to regard early tax planning as a new year resolution- started with fervency, forgotten soon after. It is, in fact, the first step toward fiscal discipline. Effective tax planning needs an expert’s guidance, but it is equally important to update oneself regarding the tax environment and its changes. The above tips intend to set the right tone for tax computations and financial management.
The understanding and perseverance of the team at Diligen in providing timely and proper guidance to its vast number of clients dictate the importance of fiscal discipline and early tax planning.