Many of us engage in an economic activity and work really hard to make a living. But as we work hard to make a living, it becomes imperative for us to work a little more harder and smarter to save our taxes (the legal way) too.
While today's younger generation are smart, have great jobs, drawing fancy salaries; a recent study by Taxspanner.com revealed that today's younger generation - especially in the age group of 25-30 - aren't showing enough smartness in the tax planning exercise and are paying significantly higher tax than the older taxpayers. The study revealed that average minimum tax paid by 25-year-old taxpayers earning Rs 10-11 lakh a year was 12%. But 34-year-olds with the same income paid only 6%.This is because, according to the study of the tax filing portal nearly 51% of the salaried taxpayers had not fully exhausted the Rs 1 lakh saving limit under Section 80C of the Income-Tax Act, 1961 and only one out of four of these taxpayers had claimed deduction for medical insurance under Section 80D of the said Act.
It is noteworthy that the figures were based taking into account bottom 10% of roughly 1.2 lakh taxpayers across different ages and found that the minimum average was lower among older taxpayers.
You see, it is very often the case that many individuals (especially the younger ones) very often keep their tax planning exercise pending till the eleventh hour and prefer splurging on things of materialistic interest which leads them to sub-optimally save tax.
So, what is the right approach?
Well, prima facie never wait till the eleventh hour to undertake your tax planning exercise as this would result in mere "tax saving" rather than "tax planning"; which in PersonalFN's view is a sub-optimal way to undertake a tax planning exercise. It is noteworthy that, unlike "tax saving" which is generally done through investments in tax saving instruments/products; "tax planning" takes into consideration one's larger financial plan after accounting for one's age, financial goals, ability to take risk and investment horizon; which is a much broader term and allows you not only to create wealth over the long-term but also protection of capital. So undertaking "tax planning" well in advance, also complements well with your overall investment planning exercise.
Very often many think that tax planning means investing upto a sum of Rs 1 lakh under section 80C of the Income-Tax Act, 1961 in eligible investment instruments / avenues. But that's not the exhaustive way. It is important to think beyond section 80C as there are other sections in the Income-Tax Act, 1961 as well which allow you avail of a tax benefit. You see, our Income-Tax Act, 1961 also considers the humane side of our life and also gives deduction for such expenditures. So, in case if you pay your medical insurance premium, incur expenditure on the medical treatment of a "dependant" handicapped, donate to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts, take a loan for pursuing higher education or if you are an individual suffering from "specified" diseases, then all this too can help you effectively plan your tax obligations, thus optimally reducing your tax liability.
Likewise, today with many having the aspiration to buy their dream home or constructing or reconstructing or repair and renovate their existing one(s),the Income-Tax Act allows you to save tax whereby in case of a loan taken for the aforesaid purpose, the "repayment of principal amount", makes you eligible to claim a deduction under section 80C of the Income-Tax Act (upto a sum of Rs 1 lakh), while the interest paid on loan under section 24(b) of the said Act.
Today, if you are a salaried individual host of allowances are provided which form a part of the pay package. But it is imperative that each component therein is structure well, in order for you to save tax on your hard earned salary. And mind you if you do so, you'll have a greater "Net Take Home" (NTH) pay, which will allow you to streamline your finances well and also, help you buy physical assets such as your dream house and a dream car.
The vital components of the salary, where restructuring can be done are:
You see, the Income-Tax Act, 1961 has prescribed exemption limits for allowances provided to employees, so structuring your salary and utilising the benefits can help you save taxes optimally.
Remember waiting till the eleventh hour to do your tax planning exercise, is not going to help in a big way. PersonalFN thinks that a self-study approach on your tax planning exercise is quite necessary as one should be well-versed with at least those tax provisions which affect you directly. And still if you are uncomfortable while doing your tax planning exercise, then you must take help of your tax consultant while filing your returns and seek opinion from him/her.