How To Plan Income Tax
Before a year starts, what are some of the moves that you make? For most people, the very first thing they actually think about is their new year’s resolutions. A new year’s resolution does not only mean a new thing to do – it means a new routine, new practices, and so much more. Also, doing something new and better each year makes you better down the lane.
Similarly, the new financial year would also have an impact on you and how you make money moves. This is a post that will show you how to plan taxes for a new financial year.
How To Plan Income Tax
Planning Your Taxes Each Year
Taxes are fees levied by the government on an income, service, or product. While paying taxes is mandatory in India, there are numerous strategies to lower your tax liability. You can satisfy your tax responsibilities through systematic tax planning, depending on your present financial situation.
Accounting for all payables, deductions, allowed exemptions, and reliefs available under the Income Tax Act will help you lower your overall due tax.
Tax preparation not only protects your cash but also ensures long-term wealth expansion. As a result, you can save more money through tax planning and put yourself in a better place to achieve your life goals.
A Step-by-Step Process on Planning Around the Taxes
When discussing tax planning, keep in mind that you cannot establish an effective tax-saving plan overnight. Instead, you must determine your situation in terms of Net Taxable Income and Gross Total Income step by step. This would assist you in reaching your long-term wealth growth and capital protection goals.
Here’s how you can get started with tax planning:
1. Calculate Your Income
To begin your tax planning, determine your Gross Total Income, which is your total income after deducting pay, rental income, company income, capital gains (both short-term and long-term), and any other sources. This phase assists you in determining your total income produced during a fiscal year without taking into account any tax deductions and only the income tax slab allowed under the Income Tax Act.
2. Calculate Your Net Taxable Income
Following the calculation of your Gross Total Income, you must proceed to the calculation of your Net Taxable Income. To do so, subtract the different deductions listed under Income Tax Sections from your Gross Total Income.
Here are various deductions that may assist you in lowering your tax bill, along with the applicable Sections:
- Investing in tax-saving products such as life insurance plans (Under Section 80C)
- Health insurance premiums are paid (Under Section 80D)
- Expenses for a disabled dependent (Under Section 80DD)
- Education loan interest paid (Under Section 80E)
- A home loan’s interest rate (Under Section 80EE)
- Contributions to nonprofit organizations (Under Section 80G)
- Residential housing rent is paid (Under Section 80GG)
3. Calculate Your Tax Payable
Once you’ve effectively lowered your tax due in the cautious manner mentioned above, you can calculate your tax liability using the most recent income tax slabs. You can check the current tax slabs online when you want to.
Some Tips and Tricks for Better Tax Management
Keep reading so we can look at some ways that you can manage your taxes:
1) Invest in Instalments
A prevalent misperception is that investing large sums in tax-saving tools is synonymous with early tax planning. This is not correct. In reality, it is preferable to invest in installments to benefit from rupee cost averaging while avoiding liquidity difficulties.
As the end of the financial year comes closer, you can increase or decrease your investments based on whether you have exhausted the tax deduction limit under the required Income Tax Act. For example, under section 80C, you can invest in ELSS, PPF, and so on a monthly basis.
2) Exhaust Your Allowances
There are many allowances that employers grant to their employees, such as meal coupons and reimbursements for mobile and internet costs, that might reduce your tax liability. By planning early in the fiscal year, you will have more time to use these allowances effectively and decrease your tax bill.
Using tax-saving allowances also helps to alleviate the load on your financial budget by allowing you to focus on other expenses.
3) Know Your Tax Obligations
Estimate your tax burden for the current fiscal year and use that figure to calculate your monthly or quarterly tax requirement. It will assist you in determining your tax due at the end of the year, allowing you to fine-tune your tax-saving investing steps every month or quarter.
If your income could change from month to month or quarter to quarter, you can adjust your tax-saving investments accordingly.
4) Choose the Right Saving Tools
As you begin tax planning early, that is, several months before the current fiscal year closes, you should aim to find the correct balance in terms of tax-saving gadgets. You should preferably choose tax-saving assets that will assist you in meeting your financial objectives on schedule. Early planning enables you to carefully assess the returns offered by your shortlisted investment options and determine which ones match your financial goals, risk tolerance, and liquidity needs.
5) Avoid Last Minutes
There are many people who seek rapid pleasure by not commencing this process early and racing to liquidate investments just once the financial year’s end deadline has already gone by. In this case, the investment is made just to lower your taxable income – with no regard for the wealth or the value creation for your money.
Investing beforehand allows you to spread your money over a longer period of time, mitigating market volatility and providing greater stability. You are also more at ease near the close of the fiscal year, knowing that all conceivable actions to save tax have been completed in a systematic manner.
There are so many moves that you can make in order to grow your finances in a new financial year. Especially when there are ways for you to save up on taxes, why not utilize them?