Tax planning is the most important part of one’s effective money management. As a diligent taxpayer of the nation, you are entitled to certain tax deductions and exemptions. That means you can save your taxes through legal ways. However, there are some parameters that you might have to consider while choosing the most suitable way. If not, your hard-earned money will be eroded over time and the returns in the long-run might suffer too.
Here are the parameters that you can consider before choosing the best way to reduce your tax outgo:
- Good returns: Any investment avenue should be judged on the returns offered over a course of time. The returns should satisfy your needs and goals.
- Liquidity: Before investing your money, you should know how liquid your investment is. Although any investment needs time to grow and generate good returns, a certain amount of liquidity is required so that you can access your money at the time of any emergency.
- Continuity in tax savings: The investment avenue should continue to save your tax on a recurring basis every year. Continuity in tax savings avoids the need to rethink on investment every year and focus on other pursuits.
Your tax planning should be aligned with your short-term and long-term life goals. There is a gamut of tax-saving options available for all the taxpayers. These allow a wide range of exemptions and deductions that help in reducing the overall tax liability. The deductions are available under section 80C to section 80U and can be claimed by eligible taxpayers. Ideally, you should invest at the beginning of the year to enjoy tax deduction proportionately over the year.
Here are some of the tax-saving avenues preferred by the taxpayers:
- Health is wealth: Buy health insurance for yourself and your family. Get a deduction under section 80D for the amount of premium paid. The maximum deduction of Rs 50,000 can be availed for the premium paid for self and parents aged below 60 years.
- Donate and save: Donate to a charitable institution for a noble cause and save taxes on the amount contributed under section 80G. There are specified institutions listed under this section and are eligible for 100% or 50% deduction of the amount contributed.
- Grow your money: Invest in PPF, NSC, tax-saving fixed deposits, ELSS and so on under section 80C to save up to Rs 46,800 in a year. The maximum amount of deduction, which can be claimed is Rs 1.5 lakh in a financial year.
Before choosing any investment avenue, you should align investment with your future goals, stage of life, your risk profile and your income level.
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I am an aspiring Chartered Accountant. I spend most of my free time dredging through the various Indian finance subreddits. I am a semi-professional bowler with a high strike rate every time there is a new tax reform!