Synopsis: In today’s article, we will highlight eight effective tax planning tips to mitigate your tax burden while maximizing your savings and investments.

The month of April marks the beginning of a new financial year and, in turn, the start of the new tax-planning season. For individuals and businesses alike, it is essential to plan their finances in a way that results in high tax savings so that the money saved can be invested to accumulate more wealth.

Below, we discuss the top eight tax planning strategies that you can utilize to reduce your tax burden while maximizing long-term wealth generation.

8 Effective Tax Planning Tips to Boost Savings

With the government introducing several changes to the new taxation regime under Budget 2023, tax planning has become even more complicated. Consequently, it is imperative for employees and businesses to assess their taxable income in advance to plan their finances better.

As per the latest amendments, individuals can, by default, avail of a higher tax rebate of Rs. 7 lakh, provided they do not claim any deductions under the Income Tax Act, 1961. However, if they want to claim deductions as per the old taxation system, they can continue to claim tax breaks, but with a reduced tax rebate of Rs. 5 lakh. So, what are some of the most useful tax-planning strategies that you can employ under the old regime? Read on.

1) Make Investments in Tax-Saving Instruments

One of the best ways to save taxes is to invest in tax-saving instruments such as Public Provident Funds (PPFs), Equity-Linked Saving Schemes (ELSS), National Pension System (NPS), National Savings Certificates (NSC), five-year Fixed Deposits (FDs), and life insurance. Tax exemptions can be claimed on these investments to the tune of Rs. 1.5 lakh under Section 80C of the IT Act.

PPF: In a given financial year, individuals can contribute anywhere from Rs. 500 to Rs. 1.5 lakh to a provident fund. But this contribution is subject to a 15-year lock-in period, with partial withdrawals allowed only after seven years. However, a PPF comes with the added advantage of offering relatively higher interest rates that are tax-free.

ELSS: An ELSS enables individuals to pursue their wealth generation goals as it involves investment in equity and equity-linked instruments with the condition of a three-year lock-in. It is the only mutual fund allowed for tax exemptions under Section 80C.

NPS: Individuals from all walks of life, including unorganized sectors, can invest in the government’s NPS scheme. In addition to the Rs. 1.5 lakh eligible for deduction under 80C, an additional Rs. 50,000 can be claimed under Section 80CCD(1b) for voluntary investments made in NPS.

NSC: Another government-backed initiative, investments in NSC can be claimed from Rs. 1,000 to Rs. 1.5 lakhs in a given year under Section 80C.

FDs: One of the safest options to park your money while availing of tax exemptions is to invest in five-year FDs that offer decent returns.

Life Insurance: Another all-encompassing tax-planning tip that allows for tax savings, retirement planning, and wealth generation is to invest in life insurance policies, including ULIPs. The premiums on these policies are exempt under 80C to the extent of Rs. 1.5 lakh.

2) Submit Rental Proofs

Conversely, if you are the type who moves around a lot for work and prefers rental accommodations, then you are eligible for a tax break on the rent paid under Section 80GG, provided your salary’s breakup excludes an HRA component. In case your employer offers a house rent allowance (HRA), then an exemption can be claimed based on the lowest amount among actual HRA, rent paid after deducting 10% of the basic pay, or 50%/40% of the basic pay depending on whether you stay in a metro/non-metro city, respectively.

3) Buy Medical Insurance

Individuals can claim tax deductions under Section 80D for medical insurance taken out on themselves, their spouse, and dependent children to the extent of Rs. 25,000. This tax break rises to Rs. 50,000 in cases of insurance premiums paid for senior citizen parents. What truly makes it an effective tax-planning tip is that it provides robust medical coverage, minimizing the impact of sudden medical expenses while being counted for tax savings.

4) Take Out a Home Loan

If you have been meaning to get your own home, then you can claim a deduction on the home loan’s interest payment and the principal amount. You are eligible for a tax break to the extent of Rs. 2 lakh for a self-occupied property under Section 24. Additionally, the principal repayment of up to Rs. 1.5 lakh can be claimed under Section 80C.

5) Save on Travel Costs

Another useful tax-planning tip is to claim deductions on travel costs if your employer offers Leave Travel Allowance (LTA). Generally, the total spending on two domestic trips in a four-year block for a family can be claimed subject to the maximum limit as ordained by the employer under Section 10(5).

6) Take an education loan

With the world constantly evolving, pursuing higher education for upskilling has become the new norm. For those taking out an education loan, a tax break is available for eight financial years under Section 80E with no amount cap.

7) Get Refunds for Specific Medical Treatments

Medical expenses incurred for certain illnesses mentioned under Section 80DDB, such as cancer, renal failure, thalassemia, or other ailments, can be claimed up to Rs. 40,000, with senior citizens eligible for deductions of Rs. 1 lakh.

8) Consider Donations

Donating to charity and relief funds not only contributes positively to advancing a noble cause but also helps reduce your tax outflows. Depending on the charity organization, a deduction can be claimed on 50% or 100% of the contribution made under Section 80G. Tax breaks can also be claimed for donations made to political parties under Section 80GGC. Best of all, these contributions are not subject to any maximum limit. 

Wrapping Up: Manage Your Taxes Well to Augment Your Savings

Individuals and businesses must meticulously plan their finances and use tax-planning tips to enhance their savings and generate higher returns. After all, money saved by following the legal tax provisions, including 80C, 80D, 80E, 80G, and more, will go a long way toward meeting your long-term wealth creation goals.