“Income tax time is when you test your powers of deduction- Shelby Friedman”
For those who have significant earnings, there is one season in addition to summer, winter, and monsoon for them. It is tax season! It is important to remember dates and undertake proper tax planning and preparation.
An important due date to file an income tax return is 31st July for individuals and non-audit cases. In the instance of audit cases, it is the 31st of October of the relevant assessment year.
Hence, it becomes important to undertake proper tax planning and implement effective strategies to minimise excess tax liabilities. When you work on your taxes with a tax planning advisor, you look at ways to defer liabilities, maximize deductions, and speed up tax credits by taking advantage of provisions of the law that work in favor of the taxpayers. Tax planning indicates planning undertaken to take advantage of every tax break available under the federal tax code.
Understanding Different Types Of Tax Deductions
Tax deduction refers to claims made by the taxpayer to reduce taxable income arising from various expenses and investments incurred. Thus, it reduces your overall tax liability and comes with benefits such as:
- Helping you save money on taxable income
- Procures funds for additional investment
Now let us look at different types of deductions:
- Standard deduction: The limit of the standard deduction for FY 2022-23 is INR 50,000.
- Allowable deductions: A HUF (Hindu Undivided Family) or individual spending on stipulated tax-saving avenues can claim a deduction of up to INR 1.5 lakh
- Section 80C and 24: These are other tax-saving tools for interest paid on home loans. Homeowners can claim up to INR 2 Lakh as tax deductions for interest on home loans of self-occupied property.
- Deduction on house rent for employees: An employee can claim a tax deduction for house rent paid if the employee or their spouse does not own residential accommodation. This deduction comes under section 80GG of the Indian Income Tax Act, 1961.
- Fixed deposits: Under section 80C of the Indian Income Tax Act, you can claim a tax deduction by investing in fixed deposits for a period of 5 years.
- Interest paid on education loan and Tuition fees: Tuition fee doesn’t include donations or development fees paid to an institution. However, you can claim a tax deduction on interest paid on an education loan under Section 80 E and on tuition fees paid toward the full-time education of any 2 children in an Indian university or school under Section 80C.
Likewise, there are also deductions under Retirement Savings plans, Post Office Time deposits, National Saving Certificates, Infrastructure Bonds, and much more.
While navigating tax season, the clever thing to do is to maximize deductions through eligible expenses. An instance, for example, could be buying a health insurance policy. This is qualified for tax deduction under the Indian Income Tax Act, section 80D. Parking your money in government schemes like the National Pension Scheme and Public Provident Fund is another such action.
Keeping Track Of Tax-Deductible Expenses
Accurate expense tracking makes tax filing easier by rendering accurate records for credits and deductions. This saves time when tax season arrives, as all the crucial information is readily available.
Tracking your expenses is a simple way to determine the accurate cash inflow and outflow. This, in turn, helps one make well-informed financial decisions.
There are several methods of keeping track of tax-deductible expenses right from simple spreadsheets to a range of software programs to automate the process. However, one common approach is keeping a detailed log of every expense using an Excel spreadsheet or accounting software.
Here we look at minimizing tax liabilities category-wise:
Maximizing Deductions for Homeowners
Owning a house entails great income tax savings, which is the pathway to building equity and saving for your future. Being a homeowner comes with tax benefits like:
- Mortgage Interest Deduction and Property Tax Deduction: Homeowners can claim a deduction on the interest they paid on their home loan, which is limited to the interest paid on the first INR 2 lakhs of their loan. While for property tax deductions, homeowners can claim deductions on their property taxes paid toward the home. This deduction is limited to the property taxes homeowners pay on the first INR 2 lakhs of the home’s value.
- Home Office Deduction for Self-Employed Individuals: Self-employed individuals can avail of tax deductions to reduce their taxable income on their home office and office supplies to run their business or practice. If you are a self-employed individual, you are eligible for deduction if a part of your home is utilized as an office space. As per the Internal Revenue Service (IRS), a self-employed person may have multiple ventures but can only utilize one home for office space.
- Energy-Efficient Home Improvements and Residential Energy Credits: Homeowners can claim tax deductions for energy-efficient home improvements made to their homes, which is worth up to INR 20,000, and on the cost of residential energy credits. Energy-efficient and residential energy credits are available for installing solar panels, wind turbines, fuel cells, and geothermal heat pumps. The credit is equivalent to the percentage of the cost of equipment and installation, subject to certain limits.
Strategies for Maximizing Deductions For Self-Employed Individuals
Tax season indicates brainstorming strategies for self-employed individuals to maximise deductions from their gross taxable income.
- Understanding Self-Employment Taxes and Deductions: These include costs incurred toward their venture or practice, interest on loans undertaken to carry out the business, insurance for and depreciation of employee salaries, and daily office expenses. Expenditures, including electricity bills, internet bills, traveling costs, and telephone bills instead of the business, are also allowed for deduction from the gross income.
- Tracking and Deducting Business Expenses: With various applications and software available, you can easily track your business expenses to maximize tax deductions while filing your income tax return as a self-employed individual.
- Retirement Contributions and Health Insurance Deductions for the Self-Employed: Section 80C of the Income Tax Act is an option for self-employed individuals wherein they can claim deductions for their contributions toward the National Pension Scheme up to a limit of INR 1.5 lakhs. Moreover, purchasing health insurance plans for own self or family members is also liable to claiming income tax deductions wherein the maximum deduction of INR 25,000 is available for paying medical insurance premiums on a policy purchased for self, dependent children, or spouse.
Strategies for Maximizing tax deductions for Salaried Individuals
Salaried individuals form a majority of taxpayers in the country. Let’s take a look at where they can minimise tax liabilities.
- House Rent Allowance: A salaried individual living in a rented premise can avail of HRA exemption on the following:
- 40% of basic salary + DA for non-metro cities and 50% of salary + DA for metro cities.
- Rent paid which is less than 10% of the basic salary + DA
- Standard deduction: Salaried individuals are eligible for a standard deduction of INR 50,000 under the tax regime of 2023-24.
- Leave Travel Allowance: LTA only includes domestic travel and can be claimed twice in a period of 4 years. However, it covers transportation costs and not the entire trip.
Tax deductions for salaried individuals also include; mobile reimbursement and food coupons like Sodexo.
Through careful planning and mitigation, you can sail through the tax season effectively by ensuring lesser financial burdens for yourself. In order to be thoroughly aware of multiple factors related to your finances and explore exciting investment opportunities, the best way to do this is through a platform like GRIP. GRIP helps you learn various facets of financing and assists with providing multiple investment options. Sign up on GRIP today and explore the world of financial freedom.
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