Tax planning means figuring out smart ways to handle your money so you don’t pay too much tax. If you are a salaried employee, it is important to manage your finances wisely. You can use some techniques to reduce the amount of tax you owe while also saving and investing your money. So let us see some steps of smart tax planning for salaried employees:
1) Understand taxable income
Knowing what taxable income is important. If you are a salaried person, this includes your pay, any extra money like bonuses or rewards, and any other financial benefits you get from your employer.
So, it is really important to know about all the ways you make money to make sure you calculate your taxes correctly.
2) Tax deductions and exemptions
One of the best ways to pay less tax is by using tax deductions and exemptions provided by the government. These include investments in instruments such as the Employee Provident Fund (EPF), Public Provident Fund (PPF), National Pension System (NPS), Equity Linked Savings Scheme (ELSS), and insurance premiums.
Additionally, exemptions can be claimed for expenses such as rent, medical bills, education costs for your children, and home loan payments. If you plan and keep track of these expenses, you can reduce the amount of taxes you owe.
3) Invest in tax-saving instruments
Investing money into tax-saving tools not only lowers how much tax you owe but also helps you build up wealth over time. You can invest in the following instruments:
- Equity Linked Savings Schemes (ELSS)
Equity Linked Savings Schemes (ELSS) are mutual funds that provide tax benefits under Section 80C of the Income Tax Act, 1961.
ELSS can give you better returns because they invest in the stock market. This means they buy shares of different companies. Stocks tend to make more money over a long time compared to things like fixed deposits or bonds.
ELSS funds usually keep your money locked in for three years. Therefore you can save for the long term.
- Public Provident Fund (PPF)
The Public Provident Fund (PPF) is a savings plan supported by the government. It is popular because it helps you save on taxes and grow your money over time.
The interest you earn on your PPF investment is not taxed. This means your savings can grow faster. Moreover, the money you put into PPF qualifies for tax deductions under Section 80C of the Income Tax Act. So, by using PPF, you can save on taxes and build up money for your future needs.
- National Pension System (NPS)
The National Pension System (NPS) is a retirement savings plan that helps you save money for when you stop working.
One good thing about NPS is that the money you put into it can help you pay less tax. You get a special tax deduction under Section 80CCD(1B) of the Income Tax Act for your NPS contributions. So, it is a good way to save for your retirement while also reducing your tax bill.
- Health Insurance
Paying premiums for health insurance is like putting money into a safety net for your family’s health. Under Section 80D of the Income Tax Act, these premiums can help you save on taxes.
Moreover, receiving this tax deduction not only helps you save money but also encourages more people to get health insurance, which is good for everyone’s well-being.
4) Plan for retirement
Planning for retirement isn’t just about saving money for later; it is a key part of managing your finances. One smart way to do this is by investing in retirement plans like the National Pension System (NPS) or pension plans provided by your employer.
Moreover, when you put money into these retirement plans, you can lower how much tax you have to pay. Because the government allows you to deduct the amount you invest from your taxable income under Section 80CCD(1) of the Income Tax Act.
Furthermore, planning for early retirement is also about making sure you have enough money to live comfortably after you stop working. So, this reduces the chance of running out of money when you are older.
5) Regular review and update
Tax planning is not something you do once and forget about; it is something that needs ongoing attention. So regularly check and update your tax plans.
By keeping an eye on your investments, spending, and ways to save on taxes, you can make changes when needed to save as much as possible.
Final words
In life’s financial journey, smart tax planning plays an important role. It helps you deal with money problems by smartly handling your taxes. By taking timely actions, you can make your taxes work better for you and also make your finances more secure in the long run.
