Importance of Tax Planning

Tax planning is an integral part of investment-making decisions. A well-defined tax plan can help you meet your financial goals. Tax planning and its implementation create a win-win situation for every individual. It helps reduce tax liability on your current income by providing exemptions and deductions along with long-term wealth creation opportunities.

Impact of Missing Tax Saving Deadline

Implications of missing tax-saving deadlines are often ignored. Taxpayers succumb to greater tax liability and opportunity loss of making timely investments. Individuals cannot claim any refunds if they do not invest in various tax-saving instruments which provide benefits, exemptions, and deductions while filing income tax returns.

Tax Saving Instruments

In the union budget of 2020, the Indian Government has proposed some changes in the taxation scheme. Here is the comparison between the New and Old Tax Regime. 

 

*The tax calculated above will be subject to an applicable surcharge and 4% Health & Education Cess.

In the New Tax Regime, the income tax rates for the income group below 15 lakhs have been reduced. However, the new tax rates will be applicable after you give up exemptions and deductions provisioned under the Income-tax Act, 1961.

If you opt for New Tax Regime, you will have to give away exemptions like Leave Travel Allowance (LTA), House Rent Allowance (HRA), and so on. Also, deductions available under Section 80 will go away. You can only claim for deduction under Section 80CCD (2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for employing new employees].

Not only that, Standard Deduction under Section 16 [which is currently Rs 50,000] for salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed.

Section 80C covers different types of tax-saving instruments which give flexibility to individuals to plan their investments as per their financial goals.

Equity Linked Saving Scheme (ELSS) – One of the most popular tax-saving instruments is ELSS. An individual can invest up to 1.5 Lakhs through a lump sum or SIP mode. The schemes have a lock-in period of 3 years from the date of allotment, after which the units can be redeemed or switched. Investors can opt for growth or dividend options while investing in ELSS.

Insurance Policy - An individual can protect his family’s future along with saving tax by purchasing a life insurance policy. Term plan, endowment plan, ULIP, retirement plan, child plan, money back life insurance, etc. are different types of plans to suit one’s investment goal.

Fixed Deposits - Fixed deposits are considered to be one of the safest havens by investors. The rate of interest is determined at the time of investment and has a lock-in period of 5 years. The principal and interest amount can be withdrawn upon maturity.

Risk-averse investors can opt for triple exemption (EEE) government-backed schemes like Public Provident Fund (PPF) under Section 80C. EEE instruments provide tax deductions at the time of investment. Interest earned, and returns generated over the tenure are also exempted from any tax liability.

Under Section 80D, individuals can claim tax deductions on the premium paid towards the health insurance policy. The deduction can be claimed on the premium paid for policies purchased for self, spouse, dependent children, and parents.

Section 80 E has a provision to claim a tax deduction on education loans. The interest paid on loans for higher education can be deducted from taxable income.

Conclusion

ELSS investments help you realize equity-linked gains while providing tax benefits under Section 80C of the Income Tax Act, 1961. Choose the investment route, whether lump-sum of SIP, based on your experience, current financial situation as well as risk-taking appetite. You can use the following Wealth Builder Calculator for your financial planning or seek advice by getting in touch with us.