Clueless about saving taxes and don’t know where to start? With less than 3 months to go for the March deadline, this 5 step guide will help you to save your hard-earned money and kick start a smart plan that will work for you next year as well.
The first step: Check your salary slip
Did you know that your CTC is not your taxable income? Do you even need to save tax? Check your salary slip, while Rs 2.5 lakhs onwards is where the income tax slabs begin, typically annual income above 4 lakhs attracts income tax depending on the components of your CTC. To begin with, a fixed sum of Rs 40,000 and employer’s PF contribution are not taxable. So is about 90 percent of your HRA. But bonuses and variable pay is taxable as per your income tax slab. Check and calculate your tax out go keeping this mind. You can also use online calculators to help you calculate the right amount. They are very easy to use and take into account various factors to arrive at the right figure
The second step: How to save tax?
With your annual tax figure in hand, use instruments under section 80C to save tax. You can invest upto Rs 1.5 lakh to save upto Rs 45,000 in taxes. Keep in mind that your contribution to EPF falls under section 80C and the Rs 1.5 lakh limit. Your existing financial commitments can also help you save tax. Home loan principal repayment of up to Rs 1.5 lakh and payment of tuition fee for your children up to Rs 1.5 lakh can be claimed as deduction u/s 80C for a maximum of two children.
If you don’t have any such commitments, other tax saving instruments under section 80C such as Tax Saving mutual funds (also called ELSS, or equity linked savings schemes), PPF, FD, life insurance, etc can help you save tax. Different instruments have different purposes, different lock in periods, and tax implications..
The third step: Why Tax Saving mutual funds (ELSS) are the best?
Tax Saving or ELSS funds are better on all three criteria: Higher long term growth as they are linked to market. Longer the holding period, there is a higher probability of making a higher return in equity markets, than alternatives like fixed deposits and equivalents. Investing flexibility is higher with ability to make monthly investments as well not requiring to make an annual commitment into the future. Withdrawing flexibility is also highest with only a 3 year lock in. Online platforms have made it very easy to get started within a few days and invest money to save tax. Simple sign up processes, smooth investment experience, and easily accessible statements make them super user-friendly.
The fourth step: Can you save tax beyond section 80C?
Do you donate to social institutions or charities or do you spend on a dependents healthcare expenses or are you paying education or home loan interest? All these expenses give you tax breaks under various sections. Gather the necessary proofs and documentation and keep them handy when you file for returns.
The final step: Documentation
Submit investment and rent proofs to your employer on time to avoid deductions in salary. File tax returns before the deadline to avoid penalties. Always ensure that you consolidate statements, rent receipts, and medical bills in one place to save yourself the hassle of looking for them last minute.
For the next year
Instead of panicking at the last minute, start an SIP in tax saving funds at the beginning of the financial year, automating tax saving for the rest of the year.