1. Know the tax bracket you fall underPrior to reducing your tax liability, it’s important to know the tax bracket you fall under. This is because when you do so, you will exactly know how much taxes you need to pay and how can you bring down your tax liability. In India, as of now, if ynou are less than 60 years of age, your income falls under the following tax slabs:
|Up to Rs. 2.5 lakhs||Nil|
|Rs. 2,50,001 to 5,00,000||5%|
|Rs. 5,00,001 to 10,00,000||Rs. 12,500 + 20% of total income exceeding 5,00,000|
|Above Rs. 10 lakhs||Rs. 1,12,500 + 30% of total income exceeding 10,00,000|
2. Make tax-saving investmentsA prudent way to minimize your tax liability as you get close to retirement is by making investments in tax-saving instruments. For instance, among all the investments, Public Provident Fund (PPF) enjoys an EEE (exempt, exempt, exempt) status, which means the amount invested, interest earned, and the maturity amount is free from taxation.
Thus, if you invest in PPF, you can lower your tax liability. Similarly, there are other tax-saving instruments, investing in which can help you minimize your tax liability. Some of the popular instruments which qualify for tax deductions under various sections of the Income Tax Act are as follows:
|80D||Payment of medical insurance premium|
|80EE||Payment of interest on home loan|
|80CG||Rent paid for accommodation|
There are various other sections in the Income Tax Act, the most common of which is section 80C, investment in which qualify for a maximum tax exemption of Rs. 1.5 lakhs in a financial year.
3. Make investments which give you the benefit of indexationAnother prudent way to lower your tax liability is to opt for instruments that give you the benefit of indexation. Indexation takes into account inflation during the holding period and raises the acquisition price of the asset, thus lowering tax liability.
For example, if you invest in debt mutual funds and hold on to your investment for a period of 36 months or more, the gains are subjected to 20% taxation with indexation benefit. In other words, the price of purchase is inflated which lowers the gains made and thus brings down your tax liability.
If you find it difficult to lower your tax liability as you close towards retirement, seek help of a professional, who will guide you in your endeavour.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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