As the major goal of financial planning is to decrease tax liabilities and increase savings, tax planning is one of the crucial components of that process. The amount of discretionary income increases with the amount of tax paid. Since March 31 marks the conclusion of the fiscal year, it is imperative that investments be made that will reduce taxes to increase discretionary income. Nevertheless, people have been known to make blunders in the heat of the moment that end up costing them afterwards.
The deadline for FY2021–2022 Tax-Saving investments is March 31, 2022. Only a few weeks are left for all of those morning people. Here are some pointers that you have to bear in mind.
Top 11 Tips For Last-Minute Tax Planning
The following are the Top 11 Tips for last minute Tax Planning:
1. Calculate your Taxable Income beforehand
Your estimated taxable income and amount may be determined using an estimate of your income at the conclusion of the fiscal year. This will aid you in determining how to lower it using legal tax-saving techniques.
For instance, if your taxable income was Rs. 5 lakh last year and you project a 20% increase in net income, your taxable income may likewise rise by that percentage. To prevent the last-minute rush, you must create a tax saving strategy in advance.
2. Make significant purchases and Investments (Section 80C)
A person’s income may be deducted for contributions up to Rs 1.5 lakh made to approved programs like the Employees’ Provident Fund (EPF), Public Provident Fund (PPF), Senior Citizens Savings Scheme (SCSS), Life Insurance Premium, National Saving Certificate (NSC), Tuition Fee, Sukanya Samriddhi Yojana (a savings program geared toward girls), National Pension Scheme (NPS), Equity-Linked Savings Scheme (ELSS), and Home Loan Principal Repayment. Despite the fact that there are too many options, carefully examining them might help you arrange your taxes more effectively.
You might want to fast shut this chapter as there isn’t much time left. A cautious approach, though, could be more effective. You can be paying into EPF if you have a salary. You can possibly be paying a life insurance payment or your children’s education. Ask your housing finance business for the preliminary statement of loan repayment for the year if you are currently repaying a mortgage. This can help you estimate how much money you have already put into activities that are allowed under Section 80C of the Income-tax Act. You can then make the appropriate investments if there is a shortage.
You should first take a look at your current responsibilities if there is a deficiency. PPF and Sukanya Samriddhi Yojana (SSY) accounts that were started in prior years are among them. You should be paying them at least the required minimums of Rs. 500 and Rs. 250, respectively. You should contribute to them within the allowed maximum of Rs 1.5 lakh per year if they are supporting your financial goals, such as retirement planning or a child’s further education. A tax deduction is also available for paying the renewal premium for active life insurance plans.
3. Keep all necessary Tax-related paperwork safely together
You could spend money during the financial year on things for which you can make deductions and avoid paying taxes. As a result, it’s important to have all of your receipts and bills on hand. Maintaining a journal for these transactions or keeping them readily available in your mobile applications can help you when it comes time to file your taxes. Important papers that may be needed as proof for claiming deductions under the qualifying headings include medical bills, travel expenses, etc.
4. Invest in voluntarily made, Tax-Deductible Purchases
Through a variety of voluntary investments or payments that qualify for tax reduction under different provisions of the Income Tax Act, the remaining tax burden may be reduced. These include investments in ELSS, NPS, ULIPs, VPF, PPF, and other small savings schemes that qualify for Section 80C deduction; an additional deduction for NPS investments up to Rs 50,000 under Section 80CCD (1B); a deduction under Section 80GG for those who live on rent but do not receive HRA; and obtaining HRA exemption by paying rent to parents under Section 10(13A).
5. Remember to purchase Insurance (Section 80D)
A claim under Section 80D may be made for the payment of a health insurance premium for yourself, your spouse, and your children up to Rs 25,000. An additional Rs 25,000 can be claimed annually if you are purchasing health insurance for your parents. If the insured individuals are elderly, they may be entitled to double the sum (Rs 50,000) for themselves, their families, and their parents (for a total of Rs 1 lakh) each year.
Many people rely on health insurance that is supplied by their employers. When they change employment, this cover disappears. Therefore, it makes sense for you to get family health insurance on your own. Purchase health insurance for an amount assured that you can afford and that you need.
Because you must continue to pay a premium each year, affordability is also crucial. You may deduct up to Rs 5,000 in costs under Section 80D if you have a preventative medical examination during the current fiscal year.
6. Calculate your Tax Obligation
First, taxpayers should calculate their tax liability after taking into account any mandatory investments or payments that are eligible for a tax deduction, such as term insurance plans, HRA tax deductions, EPF contributions, home loan principal and interest repayments, NPS contributions included in their salary package (if any), and so on.
7. Make an Investment and Expenditure Plan
When you have a general estimate of the amount of tax liabilities you may have at the end of the year, you may plan your investments and spending to minimize your tax duty. You can begin investing money each month in tax-saving vehicles like unit linked insurance plans (ULIPs), endowment plans, or PPFs, for instance, if you anticipate having taxable income of Rs. 6 lakh at the end of the year.
Early planning can offer you more time to investigate and choose effective tax-saving instruments, which may provide you more liquidity, a greater return at a lower risk, and assist you to better achieve your financial objective.
8. Invest with a Long-Term Perspective
When considering tax-saving investments, experts advise people against using a piecemeal strategy. Instead, in order to achieve the combined benefits of tax reduction and wealth development, companies should connect investments with long-term financial goals.
9. Determine your Tax Obligations on a regular basis
Once you have a projected tax amount for the financial year, you should regularly evaluate the actual income and expense at regular intervals so that you may modify your tax-saving strategies as necessary. For instance, if you were expecting a net income of Rs. 50,000 per month but instead received Rs. 80,000, you should expand your investment or take the right action.
If you don’t regularly monitor your anticipated tax liability, you could find it challenging to invest a sizable sum of money all at once to reduce your tax burden at the end of the year.
10. Determine the Tax System
The best tax system for salaried persons should be further determined (the old one or the new one). Investors should estimate their tax liabilities under both tax regimes and choose the one with the lowest tax outlay for better tax management.
In order to help individuals who were unable to benefit from the advantages under the previous tax system, Budget 2020 included a new tax system with a reduced tax rate. Although optional, this regime.
11. ITRs should be Filed well in advance of the Deadline
To avoid mistakes that might lead to investigation or a notification from the Income Tax department, you must file the tax well before the deadline. You have a higher chance of receiving the TDS return quickly if you file your taxes on time.
5 Tax-Saving Investment Mistakes to Avoid at the Last Minute
The following are the Top 5 Tax-Saving Investment Mistakes to Avoid at the Last Minute:
- The Wrong Product was Selected
In a haste to make tax-saving investments, you run the risk of picking goods that don’t align with your financial objectives.
- Purchasing Investment Plans in family members’ names
It’s important for taxpayers to be aware that some deductions can be allowed even if the investment was made in a family member’s name, while others require that the investment be made in the taxpayer’s name.
- Borrowing Funds to make Investments
Last-minute borrowing to invest in a tax-saving product results in unneeded debt. Strike a balance between the requirement for liquidity and tax savings. Only when you are experiencing a short-term liquidity crisis, such as when your paycheck is a few days late or a payment that was scheduled to be credited to your account is taking longer than expected to arrive, may you borrow money to invest in a tax-saving strategy.
Refrain from investing in tax-saving plans using your credit card or a personal loan. Borrow from friends or family for a brief period of time if there is ever an urgent need. FDs or any other suitable investment may also be used as collateral for an overdraft.You can utilize the fund from any mature assets to make an investment in a tax-saving strategy. As opposed to using any other resources, you should preferably try to spend your savings as soon as possible for any such necessity.
- Investment And Insurance Clubbing
Separate your investments for tax reduction and insurance. Traditional life insurance policies, which mix insurance and loan investment, sometimes produce subpar returns compared to PPF and other microsavings programs. In addition to their downsides hold ontologically Moreover, insufficient liquidity constraints on top three characteristics alongside lengthy tenure, insufficient liquidity constraints on top three characteristics You will be stuck with ineffective items if you purchase such policies at the last minute.
- Lack of Diversification in Tax Saving Investments
Regardless of whether you are investing for regular income or tax savings, you may significantly lower risk by diversifying your portfolio. When you rush in at the last minute, you frequently invest all of your money in just one asset class. Ideally, while investing in a tax-saving instrument, you should distribute your money among several asset classes and various schemes within a single asset class.
Tax Hacks to reduce your Tax burden
- Section 80GG: Rent paid for housing – only if you are self-employed or salaried and have not received HRA (Home Rent Allowance) at any time during the year may you claim this deduction. It is accessible for the taxpayer’s rent. For his lodging in a fiscal year within the authorized limitations.
- If your cash flow allows, you can pay an extra Rs. 50,000 to the National Pension Scheme and claim a deduction under Section 80CCD (1B) of the Income Tax Act of 1961.
- Section 80E permits you to deduct the interest paid on an education loan taken out There is no dollar limit, but the deductions are only valid for 8 years from the year the first interest is paid.
- Section 80U permits a deduction of Rs. 75,000 if you are disabled (40% disability). The amount of deduction will be Rs. 1,25,000 in the case of severe disability (80% disability). However, the clause only applies to the taxpayer and not to his or her dependents.
- Individual tax incentives are available to joint home loan borrowers. It indicates that each holder is eligible for a tax credit of Rs. 1,50,000 for principle repayment under Section 80C and Rs. 2,00,000 for interest payment under Section 24.
- If you are a non-resident Indian (NRI), you can claim Income Tax relief under the rules of the DTAA (Double Taxation Avoidance Agreement) or Sections 90 AND 91 of the Income Tax Act.
- Sections 80QQB and 80RRB of the Income Tax Act provide royalty revenue relief for authors as well as income from creative works or patents. Any royalty income from literary work is exempt up to Rs. 3,00,000 under Section 80QQB, and the same exemption is allowed for patents by Section 80RRB.
- As A Salaried Employee, You Can Claim A Standard Deduction Of Rs. 50,000 Under Section 16(A) Of The Income Tax Act Of 1961.
- HUF is a distinct entity that can claim deductions under several Income Tax Sections.
- Subject to certain criteria, the surrender value of a life insurance policy is tax-free. The tax-free redemption term for ULIPs is 5 years.
- If you redeem debt mutual funds after 36 months, you will receive an indexation benefit that will lower your tax liability.
- Section 80DDB: Treatment expenses for specific disorders are deductible from Total Income. The maximum deduction is Rs. 40,000 for patients under the age of 60, and Rs. 1,000,000 for senior persons (Above 60 year of age). This exemption is available for treating oneself or dependents.
- Indian corporations that donate to any political party in any way other than cash are eligible for a tax deduction under Section 80GGB.
- Section 80GGC allows individuals to deduct donations made to political parties and electoral trusts in any form other than cash.
- Expenses incurred for medical treatment of a dependent handicapped relative are deductible under Section 80DD. It is restricted to Rs. 75,000 for handicapped people and Rs. 1,25,000 for seriously impaired people.
- If you are purchasing a home for the first time, you can claim an income tax deduction on home loan interest up to Rs. 2,00,000 each fiscal year; however, loan sanction term, property valuation, and other factors must be considered. You can keep claiming the deduction until you have paid off your debt completely.
- If you own a hotel or conference center in a designated world historic district, you may be eligible for tax exemption under Section 80-ID, subject to certain restrictions.
- If you collect and treat biodegradable garbage to generate electricity or biological products, you may be eligible for tax breaks under Section 80JJA.
- Under section 80C, ULIPs can let you earn high returns on short-term equity investments while decreasing your taxable income by up to Rs. 1,50,000. Your investment returns are protected from the effects of a short-term capital gains tax when you use ULIPs.
- Donations to registered charity organizations or non-governmental organizations (NGOs) qualify for tax deductions ranging from 50% to 100%, depending on the organization, under Section 80G. The maximum deduction will be restricted to 10% of AGI.
- Donations to rural development and scientific research are tax deductible under Income Tax Act Section 80GGA.
- Section 54 of the Income Tax Act allows you to deduct capital gains. The capital gains are excluded if the profits of the sale are re-invested in the acquisition of another residential property within the time restrictions specified.
- In addition, during the lock-in period, you may maximize your returns by moving between numerous fund selections as many times as you wish within the fiscal year.
- A registered co-operative society with revenue from a specified business or activity may claim a tax deduction under Section 80P if the income is included in the society’s total gross income.
- Section 87 A of the Income Tax Act allows you to seek a tax rebate if your yearly income is less than Rs. 5,00,000. The reimbursement amount, however, is only accessible to individuals and not to HUFs.
- Under Section 56 of the Income Tax Act, any sum received in the form of a gift up to Rs. 50,000 is not taxable in the receiver’s hands for the fiscal year. However, if the sum exceeds Rs. 50,000, the entire amount received is taxed. If the present is received from a relative as defined by the Income Tax Act of 1961, it is tax-free.