When people start their careers and get their first job, they often don't care much about saving taxes because the salary is low. However, as salary increases over time and promotion, tax liabilities also increase. This is when tax planning becomes important because if they don't invest in tax-saving tools, their tax expenditures are higher and they can't save much for their financial goals or retirement group.
Sometimes when people see their payroll and how much tax is being reduced, they realize the importance of effective tax planning and start looking for options to save taxes. Most people invest in instruments that qualify for tax deduction under Section 80C of the Income Tax Act. However, people often stop further investment to save taxes after claiming the deduction under Section 80C. Many people are not taking advantage of some of the lesser-known tax savings methods available.
Here are 5 lesser-known tips to save taxes:
- Carryover old tax-saving investments - Many people may not realize that once their old tax-saving investments exceed the lockdown period, they can withdraw money and reinvest in investment vehicles with tax efficiency to gain tax benefits without having to spend more money. Be aware that while charts like PPF allow for partial withdrawals at the end of seven years of investment time, a tax saver like ELSS comes with a three-year lock period that can be withdrawn in whole or in part. This way, by reinvesting your old tax-saving investment, you can save on taxes.
- Planned redemptions of mutual funds - Many co-investors often repay their investment in mutual funds whenever they need the money. However, this may lead to high capital gains in a given fiscal year. According to income tax rules, 1 lakh of long-term capital gains from equity investments (stocks, mutual funds, etc.) is tax-deductible for each fiscal year. Therefore, investors should recover investments in a planned manner to save more taxes. Instead of setting aside a large sum every four to five years, investors should record a long-term capital gain of Rs. 1 lakh each year to keep their profits tax-free.
For example, if you need funds in the first quarter of a fiscal year, you can redeem some units in March (the previous fiscal year) and the remaining units in April (the current fiscal year). This way, you can claim exemptions of Rs. 1 lakh for every two financial periods.
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- Charity-Some people don't know that you can save taxes on the amount donated to charity. Under Section 80G of the IT Act, any donation to charities is eligible for up to 100% tax credit. Donations to the PM Relief Fund, CM Relief Fund, Earthquake Relief Fund, and Flood Relief Fund are eligible for 100% tax deduction. For any donation to an NGO, employees can claim a 50% discount from the donated amount.
- Early Childhood Education Fees- Many taxpayers do not realize that they can claim income tax deductions on tuition fees for their children's early childhood education i.e. pre-nursery and nursery. Pre-nursery and nursery tuition fees are eligible for deduction under Section 80C of the Income Tax Act. However, the benefits are limited to only two children. Therefore, both parents can claim a tax deduction for two children’s fees.
- Parental Assisted Tax Savings- If you have some savings, you can transfer your savings to your elderly parent's Fixed Deposit (FD) accounts and earn tax-free interest of 50,000 rupees in one fiscal year each with one of your accounts. Then your parents can invest the fund in other tax savings schemes that are eligible for deduction under Section 80C, such as SCSS, to make a bigger profit. Also remember that home loans, even from parents, are eligible to receive tax deduction benefits under Section 24B for interest payments that you make. However, you must have an appropriate certificate of interest from your parents as proof of interest payment.