Taxes are an inevitable part of life. As much as we may dislike paying them, they help fund public services and infrastructure. However, no one wants to pay more taxes than they owe. This is where using an online income tax calculator comes in handy. It helps determine your tax liability accurately so you don’t overpay. Moreover, it can also help you choose savings and investment plans to lower your tax outgo. Read on to understand how.
Determining Tax Liability
An income tax calculator helps calculate taxes accurately based on income and investments. It helps avoid errors that may lead to fines, penalties or overpayment. The tool considers:
● Income from all sources – salary, freelancing, capital gains, interest, etc
● Deductions and exemptions you are eligible for
● Applicable tax rates as per current tax slabs
It then calculates the taxes you need to pay. This clarity helps structure your finances and savings better.
Choosing the Right Tax Regime
You can choose between the old and new income tax regimes when filing returns. The calculator computes your liability under both to choose the one with lower outgoings. While the new regime has lower rates, it removes about 70 deductions, including HRA, LTA, investments made, home loan interest, etc. An accurate comparison helps you pick the optimal regime.
Plan Investments Wisely
The income tax calculator also reveals how much tax savings you require to lower your liability based on income and the regime chosen. You can then plan investments to bridge this gap well in time and avoid last-minute rushing.
For instance, investments under Section 80C, life and health insurance premiums paid, home loan interest, NPS contributions and infrastructure bonds offer reasonable deductions. You can determine how much to invest across these based on tax payable.
Structure Income Smartly
Using the income tax computation report to structure income smartly across financial years can reduce tax incidence. For instance, you can time the sale of assets to spread short-term capital gains tax over 2 years instead of one. This lowers total tax outgo. Similarly, bonuses and profit withdrawals from businesses can be structured intelligently. The taxes computed across years give clarity on how to stagger income.
Save More with Better Planning
Accurate tax calculation also helps structure your savings and investments better. Once tax dues are clear, you know exactly how much disposable income you are left with. This helps channel investments into financial instruments, offering better returns while accounting for risk appetite and financial goals.
For instance, saving plans can be invested in stocks, mutual funds, PPFs, bonds, etc., offering potentially higher returns than simple FDs. This enables faster wealth growth.
Discover Way Forward
The comprehensive tax calculation report equips you with all the relevant data to shape finances for maximum benefit. You can discern problem areas leading to high tax incidence and plug them. It also shows you provisions you may miss out on to save more tax and quantify their benefit. Based on these insights, the way forward to optimise taxes becomes clear.
With this background, let us understand the various sources of income and the parameters around which tax is calculated.
Tax Computation Basics
The critical facets involved in income tax computation are:
Taxpayer Category
The applicable tax rates and certain benefits depend on whether you are a general citizen, senior citizen or super senior citizen based on age. Selecting a suitable variety is the first step towards correct calculation.
Sources of Income
Income considered for tax includes:
● Salary and pension
● Profits from business, profession or freelancing
● Interest income from deposits, accounts, bonds, etc.
● Income from house property – rent or deemed rent
● Capital gains from investments
Deductions and Exemptions
Several investments and expenses qualify for deductions under Section 80C, like life insurance premiums, ELSS mutual funds, PPF, etc. Other deductions apply for health insurance premiums, home loan interest repayment, donations, etc. Salary components like HRA, LTA and deductions hereunder also apply.
After totalling incomes and permissible deductions, the calculator derives the final taxable figure and applies prevailing tax rates to compute tax liability.
Using the Calculator Efficiently
Input the details accurately into the tax calculator to ensure authentic outputs. Here is a brief guide:
● Select Financial Year, which is relevant to returns being filed
● Choose Old or New Tax Regime as beneficial
● Enter Accurate Personal Details – PAN, residential status, etc
● Input Income Heads – break-up across all applicable heads
● Provide Investment/Deduction Details – Section 80C, 80D and so on
● Account for Exemptions like HRA as applicable
● Double Check Inputs to avoid errors
Thus, the calculator will output reliable tax liability. Tweaking income, deductions, etc., provides valuable insights for planning.
Maximise Tax Benefits
One must make the most of available tax-saving provisions. Common options include:
● Section 80C – 1.5 lacs max deduction – Popular picks include PPF, ELSS funds, life insurance premiums, NPS, Sukanya Samriddhi, etc
● Section 80D – Health insurance for self and parents qualifies
● Home loan interest repayment under Section 24 up to Rs 2 lacs
● Section 80TTA – Interest from savings account up to Rs 10,000
● Rent paid minus 10% under Section 80GG up to Rs 60,000
● Donations to prescribed funds under Section 80G
● Planning long-term capital gains tax by holding assets over 1/3 years
● Structuring employee stock ownership plans cleverly
● Subscribing to infrastructure bonds under Section 80CCF
So, determine the deductions you miss out on and invest appropriately to reduce tax.
Summing Up
An income tax calculator is your ace in making informed tax decisions. Leverage its capabilities smartly to compute your liability accurately, structure income and investments optimally and save more tax. Stay updated on the latest reforms and changes in the law to use the calculator effectively. This will lead you to the twin benefits of tax optimisation and superior savings. So, gear up to make it your strategic partner in wealth creation.
Contact PNB MetLife to calculate your income tax.
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