A DIY Tax planning and saving guide

Last Updated: Sun, Mar 31, 2019 21:21 hrs
Income Tax Returns (PTI Photo)

Most of us are creatures of our cultivated habits. If you look at your daily life- you wake up, get ready, have breakfast and leave for work and life goes on. It is almost an everyday affair. Same goes with our finances, there are certain habits which we have inculcated and some patterns we have acquired. Some of them are good and some of them could be improved which could make prudent financial sense. Most of us earn and spend far easily without much focus on tax saving.

All of us are more inclined towards spending as it we spend towards tangible goods which give us instant gratification rather than saving, which we can appreciate only in the future. This is the principal reason that most taxpayers tend to start exploring the tax saving options available to them towards the end of the financial year. Every year, this rush arises due to the push from HR as they require proof of investment towards tax saving. By getting into tax saving late in the day, one tends to miss out on exploring all the available options.

In a hurry to save tax at the last minute, we tend to make some costly mistakes. We end up investing in products that might not be right for us. Some of the most common mistakes committed by most of us is buying Life insurance endowment plans, single premium policy, PPF, 5 year bank FDs etc. The key consideration while taking such decision is to save tax in the current year. Most of us do not consider the fact that it could be a wealth creator in the long run. The following will illustrate and help you on how to take tax planning decisions.

  • Know the tax bracket you fall in

Tax Rates for Individuals for the F.Y. 19-20

(Plus Health & Education cess of 4%)

(Surcharge of 10% on income Rs.50 Lakh- 1 Crore & Surcharge of 15% on income > 1 Crore)


Particulars

Individual Age less<60)

Senior Citizen (Age > 60 &< 80)

Super Senior Citizen (Age > 80)

Up to Rs. 2,50,000

Nil

Nil

Nil

Rs. 2,50,000 to Rs. 3,00,000

5%

Nil

Nil

Rs. 3,00,000 to Rs. 5,00,000

5%

5%

Nil

Rs. 5,00,000 to Rs. 10,00,000

20%

20%

20%

Above Rs. 10,00,000

30%

30%

30%

  • Know the important deductions available to you – How can you Save tax?

  • All the above would effectively mean that individual having annual income up to Rs.7.25 Lakh need not pay any tax (as shown below)

    Annual Income

    725000

    Less:

     

    Standard Deduction

    50000

    Invest u/s80C

    150000

    Mediclaim 80D

    25000

     

     

    Taxable Income

    500000

     

     

    Tax on above

    12500

     

     

    Less : Rebate****

    12500

     

     

    Tax Payable

    NIL

    ***Tax rebate is available only to those whose taxable income comes below Rs.5 Lakh p.a.

  • Invest in the product that is right for you

    Having known the products that are eligible for tax deductions, we must weigh the pros and cons of investing in each product and chose the product that is the best for us and is in line with our Financial Goals.

    Tax Saving investment of Rs.1.50 Lakh every year for 20 years (till retirement) in different options has different wealth potentials….

    Options

    Risk

    Lockin

    Historical Avg Return

    Invested Amount

    Expected Value at Retirement

    Fixed Deposits

    No Fluctuation

    5 Years

    7%

    ₹ 30,00,000

    ₹ 65,79,776.52

    Insurance End/Money back

    No Fluctuation

    20-25 Years

    6%

    ₹ 30,00,000

    ₹ 58,48,909.00

    PPF / EPF

    No Fluctuation

    15-20 Years

    8%

    ₹ 30,00,000

    ₹ 74,13,438.22

    ELSS (Mutual Funds)

    Fluctuation

    3 Years

    14%

    ₹ 30,00,000

    ₹ 1,55,65,262.63

  • Key take away…….

    1. Align tax saving goal with retirement. Considering, retirement is a long-term goal, it makes sense to invest in equity linked investments that has a very high potential of beating inflation in the long run. ELSS mutual funds are a good choice.

    2. Start Early. Do not wait till end of the year i.e. Jan-Feb-March. It leads to taking wrong choice of saving options.

    3. Prefer investing through SIP route in ELSS mutual funds. You do not need to do tax planning every year as SIP is for a long term. Simply give account statement for this year's investments to your HR.
  • Inculcate new habit to save taxes and an opportunity to build wealth with regular investments with the help of right financial instruments. It will help you realise that over time tax saving would be a by-product to wealth creation that you achieve through investments in ELSS.

    Milin Shah
    , is Head for Product Development & Planning at HappynessFactory.in. Views expressed are solely that of the author and may not necessarily reflect that of Sify.com or its authors.

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