As tax season approaches a new ordeal begins: Filing taxes. But if you plan in advance, it will be easier to manage taxes. So, how do you manage taxes?
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The first step is to estimate the taxable income for the year. Based on this, you will be taxed as per the income tax slab you fall under. There are several ways to reduce taxable income. Certain incomes are not eligible for deductions, while some are eligible for exemptions and deductions. This is where tax planning comes into the picture. Tax planning is a process through which taxpayers can reduce their tax liability by claiming available tax exemptions, deductions and rebates.
See Also: Income tax return status
The due date to file taxes for Financial Year 2017-18 stands extended to 31st Aug 2018. If you have already filed income tax before July 31st 2018, it is time you start tax planning for the next Financial Year 2018-19.
Investment is a year-long process, so is tax planning. Investment planning is necessary to optimize tax savings. There are some investments which should be made before a financial year ends, so that tax deductions and exemptions can be claimed. However, there are also investments which are eligible for tax benefits, even if made after a financial year ends but before filing income tax returns. Also, there are limits on exemptions and deductions. Knowing these in advance helps in sound tax planning.
Section 80C is the most popular tax deduction. This section prescribes certain investments which allow taxpayers to claim a tax break of up to Rs 1.5 Lakhs a year. There are several investments which enjoy tax deductions under Section 80C, but remember that your investment objective should be to secure your future or to meet financial goals. Commit funds to investment avenues only after identifying financial goals.
Investments made with long-term goals have lock-in periods:
Investment planning should be done keeping in mind the following objectives:
Based on financial goals, investment objectives can either be to generate income or to achieve capital appreciation.
SEE ALSO: How To Calculate Your Taxable Income?
ELSS or Equity Linked Saving Schemes are mutual funds which invest heavily in equities. Investors willing to assume higher-risk can make the optimum use of ELSS. Investments made in ELSS through SIPs can be claimed under Section 80C. Further, with a lock-in period of 3 years, ELSS helps in wealth creation and saving taxes. On redemption, ELSS gains exceeding Rs 1 Lakh a year, attract long-term capital gains @10%.
Section 80C also allows taxpayers to claim tax deductions towards payment of life insurance premiums. Taxpayers can also claim a deduction for paying premiums on annuity plans under Section 80CCC.
Section 80D allows taxpayers to claim a deduction towards the payment of health insurance premiums. You can claim a deduction of Rs 25,000 for premiums paid for self, spouse and dependent children. If you are paying premiums for senior citizen parents, the limit increases to Rs 50,000. Additionally, taxpayers can also claim deduction up to Rs 5,000 on preventive health care.
Charitable donations made to institutions prescribed in Section 80G are eligible for a tax deduction. Some donations qualify for 100% deductions and some others for 50% of the amount donated.
If you are a newbie to investments and tax filing, it is best to consult a tax advisor before you do tax planning.
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