Once you realize all your tax-deductible sources, you can calculate total amount that needs to be deducted from your total income. Now, that income left is your taxable income for which you have to pay taxes. If you go back to the slabs, you will know which slab you would fall into after all tax deductions.
Idea here is to try having your taxable income as least as possible. The lower slab you fall into the better it is for you. Best case scenario is to get your taxable income below 5 lakh mark on which you would not have to pay any tax.
However, you should also keep in mind that not paying tax will have its own repercussions. In case you are planning to avail a loan in upcoming years, banks would be a little skeptical if you are not a taxpayer. Not paying tax can be assumed as you do not have enough capabilities to repay the loan and can put you into risky category. This would mean you might have to bear higher interest rate or longer tenure. You might also have to look out for a tax paying family member to be a co-borrower or as a guarantor.
Let us understand this by taking 2 scenarios to understand better:
Note: You do not have to pay any tax if your income is below 5Lakhs per year.
Scenario 1: Let us assume that your total income in the year is 6 lakhs. You can consider a standard deduction of 50k. You have an HRA deduction of 5000 a month equating to 60k a year. So, your taxable income is now
6,00,000 – (50,000 + 60,000) = 4,90,000
This is below the 5 Lakh mark and hence the government rebates your tax. Therefore, you do not have to pay any tax for the year. However, you do need to file your ITR.
Scenario 2: Your total income for the year is 8 Lakhs. Consider a standard deduction is 50k. You have an HRA deduction of 10k per month making it 1.2 Lakh for the year. You have an education loan for which you have paid an interest amount of 60k since previous April to this March. You have made a PF contribution of 20k in the year. These deductions make your income come down to 5.5 Lakhs.
Tax payable is calculated as follows:
If you look at the taxable income, it is 50k more than the amount eligible for rebate. What you could do is to invest 50k in any of the tax saving instruments. Preferably get an insurance for self and family. Or invest in ELSS mutual funds. What it does is, it brings down your taxable income below 5L mark. Hence, you would not be paying any tax for the year.
How to plan your tax?
Tax planning is quite an important task. Most of us like to post pone this task to the month of January or later when your company starts asking for actuals or proofs for tax deductions. Some of us go beyond this and look at tax only when you have to file taxes after the year ends on March 31st.
In first case, you would’ve most likely filled provisional declaration to its fullest when your company had asked you to fill your tax plans in the month of April. Hence, your deductions would be very limited. Now, since you have not done any of it as planned, you either will have to shell out big portions of your Jan-Feb-Mar salary to save taxes or you give up and pay higher tax.
In second case where you don’t bother to look at taxes until you file them, you end up paying high taxes. You are too late to make anything work for you. Remember, you file your taxes in the month of September (or so) for the previous year. Only investments or deductions that were made before March 31st would be recognized.
Best time to plan taxes and take due action is in the month of April when you fill your provisional tax plans. Apart from building consistency, you also know the exact amount you can shell out on tax saving instruments every month and how much of tax you would need to pay. This will not only help you plan and optimize your taxes but also not force you to spend beyond your limits in the last three months.
I was once in a situation where I had filled up the Provisionals to the maximum limits and left it alone. My company asked me to share all actuals by Jan 10th. I could not do it as I could not plan well in short notice. My Jan salary was nearly one-third my usual monthly salary after tax deduction. They calculate the amount of tax you would need to pay for the entire year and deduct that amount in the last three months as it was not deducted previously. I had panicked and had to plan my tax. Now calculating my deductions, I realized I have to spend a lot of money on these instruments. I had more commitments as well as less cash in hand due to lower salary. I then had to show just a few basic deductions like insurances and made few investments as much as I could afford. I had to forego the remaining and pay taxes. That is when I realized tax is not the last three-month stuff nor it is just about provisional filing. A lot has to go into it and has to be planned well in advance to get the best out of it.
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