Tax Planning is the process of managing your personal income such that you take maximum benefit of all deductions, allowances and rebates so that your tax liability is minimized as much as possible within the legal framework. Tax planning should also be done on the basis of your risk profile. I have listed down 5 steps here that will help tax planning become more convenient.
Change your approach to tax planning - Tax planning is an important component of Personal Finance and therefore affects all aspects of personal finance like investments, asset allocation and risk management. You should approach tax planning with these aspects in your mind. You should also ensure that you spend some effort and time on tax planning from the beginning of the financial year so that last minute investment decisions with the perspective of saving tax are not made. Your time and effort will ensure that you make informed investment decisions for tax planning and over time, the process will become simpler and you will be more confident of your tax planning skills.
Understand your income structure and tax policy - Understand your income structure. If you are salaried, look at your HRA component, PF component and other headers in which your salary gets classified into and how this affects tax. If possible, have a discussion with your HR and Finance colleagues to classify the salary in such a way that it attracts minimum tax liability. Compute your taxable income at the beginning of the financial year so that you know how much tax you have to pay and how you can minimize the same.
Learn about different ways to minimise tax liability - Now that you know what is your income and what is the tax payable by you, the next step is to think of ways to minimise your tax liability.
Investment in different types of instruments - There are various instruments that you can invest in to get tax deductions. Below we have a table with details on the same.
Invest in property using a Home Loan – If you buy a house using a home loan, you qualify for certain deductions on the principal amount and the interest amount of the loan.
Gifting - You can gift money to specified relatives like spouse, brother sister and other close relatives in your family tree and neither you nor they have to pay tax on the same.
Invest in the right instruments - Here is a list of investment instruments with some details which will help in guiding you to make the right decisions