As the new tax regime comes into effect in FY24, taxpayers need to be mindful of the changes and opportunities available to optimize their taxes, Tax savings are an important part of financial planning, allowing individuals and businesses to minimize their tax liability through legal and strategic means.
Income gets taxed federally, state-wise, and locally, with extra deductions for Social Security and Medicare. While taxes are hard to dodge, you can use six strategies to shield your income.
What is Income Tax?
- Income tax is a portion of your earnings paid to the government for administrative purposes.
How to optimize tax savings under the new tax regime in FY24?
1. Investing in Tax-Saving Instruments:
- Utilize Section 80C of the Income Tax Act for deductions.
- Examples of tax-saving instruments include:
- Public Provident Fund
- National Pension Scheme
- Premium Paid for Life Insurance policy
- National Savings Certificate
- Equity Linked Savings Scheme
- Home loan’s principal amount
- Fixed deposit for five years
- Sukanya Samariddhi account
- Children’s tuition fees
2. Claiming Tax Benefits:
- Let your employer deduct tax monthly.
- If the deducted amount exceeds non-taxable expenses, claim a refund.
- File Income Tax Returns (ITR).
20 Legal Tax-Saving Tips in India:
Home Loan Tax Deduction:
- Benefit of Rs. 1.5 lakhs on principal and Rs. 2 lakhs on interest.
Interest on Savings Accounts:
- Up to Rs. 10,000 interest is tax-exempt; for seniors, it's Rs. 50,000.
NRE Account Interest:
- Interest from NRE accounts is tax-free for non-resident Indians.
Life Insurance Policy Maturity Amount:
- Maturity amount is tax-free under certain conditions.
Scholarship for Education:
- Scholarship income is exempt from income tax.
Shares or Equity Mutual Funds:
- Long-term gains up to Rs. 1 lakh are tax-free.
Wedding Gifts:
- Gifts from relatives are tax-exempt; friends' gifts capped at Rs. 50,000.
Income from Agriculture:
- Agricultural income is not taxed directly.
HUF and Extra Income:
- Hindu Undivided Family (HUF) has separate tax exemptions.
Inheritance:
- Money received through inheritance is tax-free.
Section 80C Investments:
- Invest up to Rs. 1,50,000 for deductions.
Contributions to NPS:
- Additional Rs. 50,000 can be invested tax-free in NPS.
Provident Funds Interest:
- Interest on provident funds is not taxable.
Education Loan Interest:
- Interest paid on education loans is tax-free under Section 80E.
Health Insurance Premium:
- Deduct up to Rs. 25,000 for own and dependent insurance premium.
Expenses for Disabled Dependents:
- Deduction for expenses on disabled dependents under Section 80DD.
Treatment of Specific Diseases:
- Medical expenses for specific diseases eligible for deduction under Section 80DDB.
Charity Donations:
- Deductions for donations to specified relief funds and charities under Section 80G.
Donations to Political Parties:
- Unlimited deductions for donations to political parties under Section 80GGC.
Tax Savings for Business Owners:
- Business owners can claim travel expenses as part of business costs to save taxes.
Q: What methods can I use to reduce my taxable income? A: You can reduce your taxable income by contributing to an employee contribution plan like a 401(k), putting money into a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.
Q: How much should I put into my 401(k) to reduce my taxes? A: 401(k) accounts are pre-tax, meaning the money you contribute isn't taxed when you put it in. The more you contribute, the lower your taxable income, resulting in a smaller tax bill.
Q: What expenses can I deduct if I'm self-employed, according to the IRS? A: The IRS allows deductions for various expenses, including home office costs, vehicle costs, cell phone expenses, contributions to a self-employed retirement plan, and premiums for self-employed health insurance.
Conclusion: It's essential to fulfill all legal tax obligations, but there are ways to minimize what you owe. Spending a bit of time on the IRS website (IRS.gov) and exploring reliable financial information sites may reveal significant tax savings—potentially hundreds or even thousands of dollars.
FAQ: How Can I Reduce My Taxable Income?