Simple strategies to optimise tax savings for all categories of working professionals

Effective strategies for maximising tax savings tailored specifically for salaried, business individual as well as self-employed professionals

The tax season has now gone by, however, salaried individuals still find themselves exploring avenues to minimise their tax liabilities as do business individuals and self-employed professionals. With proper planning and an understanding of tax laws, there are several strategies available for all these groups of individuals to optimise their tax savings for the next tax year.

FOR SALARIED INDIVIDUALS

All salaried class deductions are based on the old regime, so under these broad heads do look out for what new regime would mean for you. Here are 7 ways in which those who are employed can reduce their tax liability:

1. Utilising Section 80C Deductions: Section 80C of the Income Tax Act provides various avenues for tax saving investments. Salaried individuals can invest in instruments such as Public Provident Fund (PPF), Employee Provident Fund (EPF), Equity Linked Savings Schemes (ELSS), National Savings Certificates (NSC), and Sukanya Samriddhi Yojana (SSY ). By investing in these instruments, individuals can claim deductions of up to ₹ 1.5 lakh annually, thereby reducing their taxable income significantly.

2. Contribution to the National Pension System (NPS): Contributions made towards the National Pension System (NPS) are eligible for tax deductions under Section 80CCD(1B) of the Income Tax Act. Salaried individuals can claim an additional deduction of up to ₹ 50,000 over and above the limit of ₹ 1.5 lakh available under Section 80C. Opting for NPS not only helps in tax savings but also ensures retirement planning and financial security in the long run.

3. Health Insurance Premiums: Purchasing a health insurance policy for oneself, one’s family, or parents can provide dual benefits of financial protection and tax savings. Premiums paid towards health insurance policies qualify for deductions under Section 80D of the Income Tax Act. Salaried individuals can claim deductions of up to ₹ 25,000 for premiums paid for themselves, their spouse and dependent children. An additional deduction of ₹ 25,000 is available for premiums paid towards parents' health insurance, which increases to ₹ 50,000 for parents who are senior citizens.

4. Home Loan Interest Deduction: Salaried individuals who have availed of a home loan can claim deductions on the interest paid towards the loan under Section 24(b) of the Income Tax Act. For a self-occupied property, individuals can claim deductions of up to ₹ 2,00,000 annually. Additionally, if the property is rented out, the entire interest paid on the home loan is eligible for deduction without any limit, leading to significant tax savings.

5. Education Loan Interest: Interest paid on education loans for higher studies qualifies for deductions under Section 80E of the Income Tax Act. Salaried individuals can claim deductions for the interest paid on education loans for themselves, their spouse, or children. There is no upper limit on the deduction amount, thereby providing relief to individuals financing higher education through loans.

6. House Rent Allowance (HRA): Salaried individuals receiving House Rent Allowance (HRA) as a part of their salary can claim exemptions under Section 10(13A) of the Income Tax Act. The exemption is available for the least of the following: actual HRA received, 50% of salary for individuals residing in metro cities (40% for non-metro cities), or rent paid minus 10% of salary. By furnishing rent receipts and rental agreements, individuals can optimise their tax savings through HRA exemptions.

7. Leave Travel Allowance (LTA): Leave Travel Allowance (LTA) is another component of the salary package that offers tax benefits to salaried individuals. Under Section 10(5) of the Income Tax Act, individuals can claim exemptions on actual travel expenses incurred for themselves and their family members. The exemption is limited to travel expenses for two domestic trips within India in a block of four calendar years.

FOR BUSINESS AND SELF-EMPLOYED PROFESSIONALS

Those involved in running businesses or those who are self-employed professionals can maximise their tax savings using these 8 simple strategies:

1. Understanding Business Expenses: One of the fundamental principles of tax optimisation for business individuals is to ensure the meticulous tracking and documentation of business expenses. Deductible expenses such as office rent, utilities, office supplies, marketing expenses and professional fees can significantly reduce taxable income. It's crucial to maintain accurate records and receipts to substantiate these deductions in case of an audit.

2. Leveraging Depreciation: Business owners can benefit from depreciation deductions on tangible assets used in their business operations, such as machinery, equipment, vehicles and office furniture. By depreciating the cost of these assets over their useful life, entrepreneurs can lower their taxable income each year. Consulting with a tax professional can help determine the appropriate depreciation method and maximise deductions while staying compliant with tax laws.

3. Retirement Planning: Establishing a taxefficient retirement plan is not only a prudent financial decision but also a powerful tax-saving strategy for business individuals and self-employed professionals. Contributions to the Employee Provident Fund are typically tax-deductible and can reduce taxable income. Moreover, these contributions grow tax-deferred until withdrawal, allowing for wealth creation.

4. Health Savings Accounts (HSAs): For selfemployed individuals and business owners with high-deductible health insurance plans, Health Savings Accounts (HSAs) offer a triple tax benefit. Contributions to HSAs are tax-deductible, earnings on contributions grow tax free and withdrawals for qualified medical expenses are tax free. By maximising contributions to HSAs, entrepreneurs can lower their taxable income while saving for future healthcare expenses.

5. Maximising Business Tax Credits: Business individuals can take advantage of various tax credits to reduce their tax liability. Research and Development (R&D) tax credits, for instance, incentivise innovation by providing tax credits for qualified research expenses. Additionally, hiring individuals from certain target groups, such as veterans or individuals with disabilities, may qualify businesses for the Work Opportunity Tax Credit (WOTC). Exploring available tax credits and ensuring compliance with eligibility requirements can lead to substantial tax savings.

6. Strategic Income Deferral and Timing: Self-employed professionals have the flexibility to control the timing of their income, allowing them to strategically defer or accelerate income to minimise tax liability. By deferring income into the following tax year or accelerating deductible expenses into the current year, individuals can effectively manage their taxable income. However, it's essential to consider the impact of income deferral or acceleration on cash flow and longterm financial goals.

7. Utilising Home Office Deductions: Selfemployed individuals who operate their businesses from home may be eligible for the home office deduction, allowing them to deduct a portion of their housing expenses, such as mortgage interest, property taxes, utilities, and maintenance costs. To qualify for this deduction, the home office must be used regularly and exclusively for business purposes. Proper documentation and adherence to IRS guidelines are essential to claim this deduction accurately.

Conclusion: Salaried individuals have various avenues in which to optimise their tax savings through prudent financial planning and investments. However, as mentioned above all salaried class deductions are based on the old regime, so under the broad heads given above, look out for what new regime would mean for you. By leveraging deductions available under different sections of the Income Tax Act, individuals can significantly reduce their tax liabilities while securing their financial future. However, it's essential for individuals to assess their financial goals, risk appetite and tax-saving requirements before making investment decisions. Seeking professional advice from tax consultants or financial advisors can further aid in implementing effective tax-saving strategies tailored to individual needs. By staying informed and proactive, salaried individuals can navigate the tax landscape with confidence and maximise their savings potential. Moreover, seeking guidance from tax professionals and staying abreast of the relevant tax laws and regulations is paramount. Through diligent planning and execution, business individuals and self-employed professionals can pave the way for a more prosperous and tax-efficient future.

Understanding these tax-saving strategies is crucial. According to Ajay Lakhotia, Founder and CEO of StockGro, "Utilising various Income Tax incentives effectively is essential for every Indian acheive their long-term goals faster."

The same rules apply to business individuals and self-employed professionals. By leveraging deductible business expenses, maximising retirement contributions, capitalising on tax credits, and strategically managing income, entrepreneurs can optimise their tax liabilities while fostering financial growth and stability.