A beginner's guide to tax planning

The act of minimizing your tax liability by making the best use of the available tax benefits is an art called ‘tax planning’. In order to manage your finances by saving money on taxes, it is imperative that you plan your taxes well. You can explore and invest in tax-saving instruments such as Mutual Fund plans, Insurance, etc. To plan taxes through these options, it is first necessary to understand these important tax terms:

  • Basic exemption limit

    As a conscientious citizen, everyone has a responsibility to pay taxes regularly. However, not everyone is obliged to do so. You are required to pay taxes only when your income is taxable. How does one find out if one’s income is taxable or not, though? By knowing about the basic exemption limit.

    A basic exemption limit is the minimum income limit above which your income becomes taxable. Simply put, if your income is below the basic exemption limit, you need not pay any taxes.

    For instance, if the basic exemption limit is INR 2,50,000 for the current financial year and your annual income is below this amount, you are not required to pay any taxes.
  • Slab rates

    Slab rates are different levels of income according to which your taxability is determined. According to the Income Tax Act, 1961, every taxpayer is divided into different income groups to determine the rates at which their income will be taxed. These groups are called tax slabs. Whenever your income increases or decreases, it could also bring a change in your tax slab and thereby in your tax liability. For instance, if you are an individual under the age of 60 and your annual income is above INR 5,00,000 but below INR 10,00,000, your income will be taxed at 20%. Individuals whose annual income is over INR 10,00,000 are taxed at 30%.

    To legally reduce your tax liability, you can invest in tax-saving instruments and avail of tax benefits like deductions and exemptions available on them.
  • Deductions

    A deduction is a kind of tax benefit which can be availed of to reduce taxable income. This deduction could be an income or an expenditure that you incur. This deduction is subtracted from your gross income, to calculate your taxable income and thereby your taxability.

    Gross income: INR 5,00,000

    (-) Deductions under section 80 C: INR 1,50,000

    Taxable income: INR 3,50,000

    As per your expenses and income, there could be many deductions you can avail of.

    For instance, by investing in Tax Saving schemes like 5-year Bank Fixed Deposits, some post office schemes, Public Provident Funds, pension funds, Insurance, etc. you can avail of a total deduction of up to INR 1.50 lakh under Section 80C and reduce your tax liability.

    While looking for instruments to invest, consider the options that can help you avail of different deductions. For example, you can claim a deduction on house rent paid under Section 80GG and on your Medical Insurance under Section 80D.
  • Tax exemptions

    Tax exemptions are monetary exclusions that can reduce your taxability. These exemptions either provide you tax relief, reduce tax rates or ensure that tax is applicable only on certain portions of your income. For example, if you pay the rent of your house, you can avail of an exemption on your House Rent Allowance that is calculated as per your salary. While calculating your taxable income, a certain portion of your HRA gets exempted from the gross income.
  • Gross income and taxable income

    Your gross income is the total income you have earned in a financial year. It is the sum total of all the income from the following income heads:
  • Salary
  • House Property
  • Other Sources
  • Capital Gains 
  • Business/Profession

From this gross income, your deductions and exemptions are subtracted to calculate your taxable income. On this taxable income, you find your tax liability as per different slab rates.

In a nutshell

Knowing these tax terms can help you calculate your tax liability better and thereby save on your taxes. While looking at your investments and expenses look for instruments where you can take advantage of maximum tax benefits. For, example, instead of just depositing your money in Saving Bank Accounts, invest them in Bank Fixed Deposits or a Public Provident Funds to earn better interest rates as well as avail of deductions. Efficient tax planning can help you pay the least amount of taxes in addition to managing your finances better.

Investor can claim a deduction of a maximum of Rs. 1.5 lakh per annum by investing in a tax-saving FD. Know about your returns with FD Calculator.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.