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How Not To Lose Sleep Over Tax Planning

Summer is here and the rising mercury isn’t the only thing keeping some tax payers up at night. The financial year is also drawing to a close. In a matter of days.

While experts advise that it’s wise to invest your money, for the purpose of strategic tax planning, through the year, for those who haven’t, all is not yet lost. Even if the last moment rush is like “scoring 30 runs in the last two overs of a cricket match”.

Making investments to save tax in the last couple of weeks of the year, therefore, is “difficult but doable”, certified financial planners Jayant Pai and Kartik Jhaveri told BloombergQuint.

The first step, they said, is to identify the tax rate applicable to a taxpayer.

This tax rate is defined by the income tax law and often altered by the government in the Union Budget.

For financial year 2016-17, individuals below the age of 60 years need not pay any tax on income of up to Rs 2.5 lakh. A 10 percent tax rate is applicable to those with an income between Rs 2.5 - 5 lakh. For those with an income of Rs 5-10 lakh, the tax rate applicable is 20 percent, while a 30 percent tax rate applies to those with a taxable income of Rs 10 lakh or more.

There are provisions in the Income Tax Act, 1961 for salaried individuals to reduce their tax burden via deductions and exemptions (by making certain investments).

Section 80C: A Taxpayer’s Best Friend?

Under this section, a tax payer can get a deduction of up to Rs 1.5 lakh by investing the amount in, broadly, six major instruments, said Jhaveri. The investment can be made in one instrument or distributed over several. A provident fund contribution is also a cpunted towards this limit.

These six categories include:

1. Equity Linked Savings Scheme (ELSS): a mutual fund scheme with a three-year lock in period.

2. Public Provident Fund: a provident fund with a lock-in of 15 years, but the amount can be withdrawn for important occasions such as marriage and child’s education after five years. The government fixes the interest rate - for 2016-17 it’s 8.1 percent.

3. Life Insurance premium: insurance premium paid by a taxpayer towards a term plan or unit-linked insurance plan.

4. Five-year fixed deposit: Money locked in for five years, interest rate decided by banks.

5. Provident Fund: contributions made by an employee in a year.

6. Repayment of principal amount on home loan: the payment towards principal amount in a home loan’s equated monthly installment (EMI).

Are There Other Ways?

Apart from Section 80C, you can also get a deduction of up to Rs 60,000 under Section 80D. This includes a deduction of up to Rs 25,000 on payment of an annual health insurance premium and a medical check-ups for the assessee and his parents, if they are senior citizens, of up to Rs 35,000.

A taxpayer can get a further deduction of up to Rs 50,000 a year by investing his income in the National Pension System.

Section 24 of the Income Tax Act provides for a deduction of up to Rs 2 lakh towards interest payment on a home loan in any financial year.

So make these investments and don’t forget to take help from a financial planner if needed. A qualified, licensed one.