Paying taxes is one of the most important facets of being an ideal citizen. The only way the government is able to offer public services and facilities is by way of the taxes collected from the citizens and it is essential for citizens to pay taxes in order to ensure the smooth continuation of the country and its economy.
However, even as you get ready to file your income taxes, it is important to find the best way to reduce your taxation burden. Everyone wants to reduce their tax liabilities but it is important to do it in an ethical and legal manner. The government on its own part also tries to reduce the taxation burden for citizens by offering various kinds of tax exemptions as well as deductions. It is important to take advantage of these and ensure that you are able to drastically reduce the amount you are liable to pay as taxes.
Even as you begin working on a plan which elaborates upon the best manner to reduce your tax burden, it is important to keep in mind 4 rules which ensure the best tax savings. Read on to learn about how best to ensure that your taxation liabilities are minimal, and that you are able to dedicate a greater chunk of your income towards saving and eventually building up a substantial corpus for your retirement.
1. Invest on tax saving instruments:
There are different kinds of investment instruments and each of them offers benefits different from the others. The kind of investment instruments that you should be looking to invest in should offer you higher tax savings than any other instrument. It is important to conduct thorough research before you make an investment to understand the different benefits that the instrument will help you avail. Make sure to assess several different investment instruments before you make the investment in order to ensure that you are making an informed decision.
2. Invest in health insurance:
Health insurance policies are one of the best tax saving options available for people. The premiums paid towards health insurance are often exempted from taxation or high amounts of tax deductions are available, both of which ensure that you are able to significantly save taxes.
3. Claim deductions on loan payments:
Many of us have loans, either in the form of a student loan we took during our college days, or loans for a car or a home or even a bike. The interest that you are paying on these loans is liable for tax exemptions and deductions, which ensure that you are able to save a significant amount of taxes. Section 80D of the Income Tax Act, 1961, actually has provisions wherein deductions of up to INR 25,000 are available on premiums paid towards health insurance policies. Senior citizens can even avail deductions of up to INR 50,000. It is important to know of the different options available to you as a taxpayer to ethically reduce your tax burden, in order to understand how best you can avail taxation benefits.
4. Make careful investment decisions:
The tax saving benefits that the government offers is only valid up to a certain amount. For instance, INR 1.5 lakh is the highest amount that the government allows in the form of tax savings. To make best use of this provision, make sure to assess your tax saving expenses. This would include your EPF contribution, repayments on home loan or car loan or even student loan, payments made towards children’s school fees, and also the insurance premiums you may be paying for yourself, your spouse, and any dependent children or parents.
Once you have assessed the expenses which are enabling you to save taxes, you need to deduct this amount from the INR 1.5 lakh. The resulting figure is the amount that you should be investing in order to gain high taxation benefits.
Tax savings is one of the most important facets of your financial planning, and tax saving rules are one of the first things you should be learning about once you start paying taxes.
Make sure to check the best tax saving options available to you before you begin the investment process. However, while tax saving investments should be your first criteria, there are several other things you must consider before making an investment. Read on to learn about the different factors you should be considering before you invest.
5. Identify your own requirements in terms of the investment you are making. Understand your goals and the time period within which you expect or intend to fulfill this goal. For instance, if you are investing in order to achieve short-term goals, you can invest in instruments that offer guaranteed returns. However, if you are looking to meet your long-term goals, it is best to invest in an instrument that offers you high returns over a period of time. Investing in the equity market, for example, is a great way to meet your long-term goals. While this instrument does carry high risk, the long time period ensures that the market has enough time to stabilise and offer returns to the investor.
6. Understand your own risk profile as an investor. Investors who have a higher risk profile are willing to invest in instruments such as equity stocks which do offer higher returns but are also extremely susceptible to market conditions. It is important for an investor to ensure that their personal risk profile is in line with the risk offered by the investment instrument. If the risk posed by the instrument is higher than your risk profile, you may end up regretting the investment.
7. Ensure a healthy mix of instruments. Diversifying your investment portfolio ensures that you face minimal amounts of risk as your risk is also spread out over multiple investment instruments. With a diversified investment portfolio, you can invest lesser amounts in each instrument and thereby gain high returns.
Investing is an important part of your financial life, and it is important to do it in a way that you get the highest returns without losing too much. This is where tax savings gain even more importance since they enable you to reduce your taxation liabilities and live a fiscally responsible life.