Secrets of Tax Planning: 11 effective ways to save tax!

Come the fiscal year-end and everyone is scrambling to make their tax-saving investments! Many times in haste it isn’t even well planned and several individuals end up making investments they don’t really need or which cannot fulfill their financial goals. Therefore it is important that tax planning is done in advance, so that you get the best out of it – you save tax efficiently and make investments that actually work toward fulfilling your goals!

What is tax planning?

Tax planning is analyzing a financial condition from the tax perspective. Tax planning has three main objectives - reduction of tax liability, minimum litigation and maximum contribution to your productive investments.

The process of tax planning considers several aspects

• Income
• Time of the income inflow
• Selection of investments
• Time of investments made
• Size of investments made
• Other expenses

It is important to understand that the objectives of tax planning do not go against the idea of tax laws. Instead it intelligently applies tax provisions to accomplish not only an individual’s financial goals, but also benefit the economy.

Types of tax planning

The main types of tax planning are:

• Short-term & long-term tax planning: The yearly tax planning done closer to the end of the financial year is short-term tax planning. On the other hand, tax planning done before hand and not in haste is long-term tax planning.
• Permissive Tax Planning: Under this type of tax planning, you try to get different tax concessions, deductions and incentives, but all only permissible within the tax laws, without changing any facts.
• Purposive Tax Planning: This type of tax planning may mislead the law; by trying to avail maximum benefits but changing certain facts.

Effective ways to save tax

In India, there are several tax saving options for eligible taxpayers that allow exemptions and deductions to bring down their tax liabilities. These are mainly available under Section 80C till Section 80U.

There are two main methods to save tax — to show reduced taxable income and to invest in tax saving financial products.

Here are some effective ways to save tax –

1. Save via interest payments on loans. Avail tax exemption on interest paid on home loan under Section 80EE. You can also get tax deduction under Section 80E for education loan.
2. You can also claim a deduction under 80C for the tuition fees of your child
3. Avail tax benefits for charitable donations made under Section 80G. If you make donations for rural development or science research, then too you can get tax benefits under 80GGA.
4. Buy a health insurance for yourself and family and get tax benefits under Section 80D
5. Under Section 80GG, you can get tax benefits on House Rent Allowance (HRA). However, you need to show the rent receipts to avail this
6. There are many components in your salary that help you claim tax deductions - medical bills, daily travel allowance, telephone & internet bills and leave travel allowance, as long as you can produce proofs of the same
7. If you have a disabled dependent, then you can avail tax benefit under Section 80DD. This can assist you in saving up to Rs 1.25 lakh of the taxable income. A disabled individual too can claim tax benefits under the same section. Tax benefits are also available for a person for treatment for treatment of specified diseases under Section 80DDB
8. Under tax saving investments, salaried individuals can claim tax benefits for their contribution towards EPF under Section 80C
9. Investment in PPF is a good long term investment, that also gives tax deductions on your yearly contributions
10. Government schemes like Sukanya Samriddhi Scheme and National Pension Scheme (NPS) also offer a good investment choice with tax deductions
11. Equity linked savings scheme (ELSS) in mutual funds is one of the best long term investment option that comes with tax benefits.