Everyone pays tax in some way or the other — and as we experience upward mobility and earn higher incomes, our tax liability increases proportionally. There are of course ways to limit how much tax you owe the government — legally.
An average Indian pays taxes in myriad ways — the Goods and Services Tax (GST), capital gains tax on your investments, and the most crucial of all, income tax. The only way to reduce the amount of GST you pay is by spending less, or if you have a GST number, by setting off your purchases. As for the other two — i.e. capital gains tax and income tax — citizens of India earning above a certain slab, as well as NRIs who have sources of income in India, are all liable to pay taxes on their income and capital gains every financial year.
When it comes to tax planning, typically, it is income tax that we have the most room to play with. There are several instruments that you can utilise to reduce your net taxable income. Several sections of the Income-tax Act, 1961, allow certain investments and payments to be exempt from taxation. The most popular and well-known of these provisions is Section 80C, which allows for an exemption of up to ₹1.5 lakh for investments made in instruments like public provident funds (PPF) and equity-linked savings schemes (ELSS), among others.
Investing in the National Pension Scheme (NPS), under Section 80CCD, allows for an exemption of up to ₹50,000. Charitable donations, too, can help to save on taxes while contributing to a good cause (under Section 80G).
Tax exemptions are also possible in certain other situations. If you’re paying premiums on an insurance policy for your family or elderly parents, you can claim an exemption of up to ₹1 lakh (depending on the age of the taxpayer and their parents). Home loans are a particularly useful tax-saving instrument, since you can claim deductions on both the principal amount as well as the interest. If you’re paying interest on a home loan, you can avail a deduction of up to ₹2 lakh under section 24B, while section 80C allows a deduction of up to ₹1.5 lakh on the principal amount paid.
Tax planning can seem complex, but if done strategically, it can be simple. A good, qualified financial advisor can not only help align your finances with your goals, but help plan your taxes better.