Taxes can feel overwhelming, especially when tax season arrives. However, by incorporating a few simple daily habits, you can save money all year long. Regular tax optimisation helps you reduce your overall tax liability, track deductible expenses effectively, and make better financial decisions. Here, we will break down some approachable strategies to help you adopt tax-saving practices every day.
Essential Practices for Managing Tax Liability
Reducing your tax liability involves legally lowering the amount of taxes you owe. Here are some small habits that can help you with better tax planning:
Invest in Tax Deduction Instruments
Every year, you can reduce your taxable income by up to Rs 1.5 lakhs through Section 80C deductions. This benefit is available to individuals and Hindu Undivided Families (HUFs). Please note that this facility is only available under the old tax regime, not the new one. Some critical tax-saving instruments include:
- Employees Provident Fund (EPF)
- Public Provident Fund (PPF)
- Fixed Deposits (with a tenure of more than 5 years)
- Life Insurance Policies
- ELSS Mutual Funds
- National Pension Scheme (NPS)
Investing in these instruments not only reduces your tax liability but also provides the added benefit of secure returns.
Choose Relevant Components in Salary Structure
Salaried employees should carefully assess the salary structure provided by their employer and select components that can help optimise taxes. You may choose from options like House Rent Allowance (HRA), reimbursements for internet expenses, travel, education allowances, and food coupons. Additionally, opting for relevant deductions and exemptions where applicable can help reduce your taxable income.
Tax Benefits on Home Loans
Under the Income Tax Act of 1961, if you avail of a loan from a bank, NBFC, or any housing finance institution for purchasing or constructing a house, both interest and principal payments are eligible for deductions. The principal repayment is eligible under Section 80C, with a limit of Rs 1.5 lakhs.
Tax Benefits on Health Insurance
Premiums paid towards health insurance for yourself, your spouse, dependent children, and dependent parents are eligible for tax deductions. You can claim a deduction of up to Rs 25,000 for premiums covering yourself, your spouse, and dependent children and up to Rs 50,000 for senior citizen parents.
How to Plan for Tax Implications of Financial Decisions
Every financial decision you make has tax implications. Being mindful of these can lead to substantial savings over time.
Plan Purchases and Sales Carefully – When buying or selling high-value assets like property or a car, it is important to consider the tax implications. For instance, capital gains tax applies to the sale of investments or properties. Timing the sale of assets, such as during a year when your income is lower, can help minimise your tax burden.
Choose Tax-Efficient Investments – Tax-efficient investments, such as index funds and exchange-traded funds (ETFs), tend to generate fewer taxable events, helping to reduce the taxes you owe.
Be Mindful of Side Income – With the rise of freelancing and side gigs, many people now have additional income streams, which are taxable. It’s wise to set aside a portion of your earnings for estimated taxes each time you receive your salary. This habit helps avoid a large tax bill at year-end and ensures you are prepared for any additional taxes.
Tracking Deductible Expenses
Here are some of the best ways to stay on top of your deductible expenses:
Keep Digital Records of Expenses – Using a smartphone app or simply taking photos of receipts can help you keep track of deductible expenses like work-related supplies, medical costs, or donations. Small business owners and freelancers can also benefit from tracking expenses like home office supplies, internet, or travel. Keeping digital records ensures you are ready when tax season arrives and makes deductions easier to claim.
Record Travel Expenses – If you use your personal vehicle for business or charitable purposes, it’s essential to keep a record of your travel expenses, as they can be deducted from your taxable income. Using mileage-tracking apps or simply maintaining a log in your phone’s notes can simplify this process.
Track Education and Professional Expenses – Many professional and educational expenses are deductible, such as tuition for further education, courses to improve your skills, or professional licensing fees. Make it a habit to record these expenses as soon as you make a payment. This will make it easier to claim them during the annual tax filing period.
Wrapping Up
Tax optimisation doesn’t have to be a daunting, once-a-year task. By building small, manageable habits into your daily routine, you can make tax optimisation a part of your financial wellness plan. This consistent approach helps reduce stress, avoid surprises, and maximise savings when you file your tax returns.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*This article is for informational purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
