Ways to Reduce Your Taxes

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes, and each basic method might have several variations. You can reduce your income, increase your deductions, and take advantage of tax credits.

Reducing Income ( Reduce Taxable table income) : Depend on your AGI (or modifications to your AGI)-- such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your finances. Because your adjusted gross income is so important, you may want to begin your tax planning here.

What goes into your adjusted gross income? AGI is your income from all sources minus any adjustments to your income. The higher your total income, the higher your adjusted gross income. As you can guess, the more money you make, the more taxes you will pay. Conversely, the less money you make, the less taxes you will pay. The number one way to reduce taxes is to reduce your income. And the best way to reduce your income is to contribute money to a saving under section 80C or similar retirement plan at work. Your contribution reduces your wages, and lowers your tax bill.

As you can see, two of the best ways to reduce your taxes is to save for retirement or life insurance or other type of savings, either through section 80C at work or through a traditional  PF/EPF/PPF plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes. Same with your the amount your contribute towards investment or for your life insurance.

Increase Your Tax Deductions :

Taxable income is another key element in your overall tax situation. Taxable income is what's left over after you have reduced your AGI by your deductions and exemptions. Almost everyone can take a standard deduction, and some people are able to itemize their deductions. 

Itemized deductions include expenses for health care( Medical bills) you can save tax on max 15000/- INR , mortgage interest, job-related expenses (Like phone bills, broad band bills and some travel bills), House rent Allowances, LTA (leave travel allowances), tax preparation fees, and investment-related expenses. One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deduction.

Your standard deduction and personal exemptions depends on your filing status.

The best strategies for reducing your taxable income is to itemize your deductions, and the three biggest deductions are mortgage interest, LTA, HRA (House Rent Allowance).

Take Advantage of Tax Credits: Once we've tweaked our taxable income, we are ready to focus our attention on various tax credits ( also called as tax savings options). Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, premium payed to wards your life insurance premium and premium payed towards Health insurance and amount paid towards investments in Equity oriented funds and Savings like NSC Bonds, Postal Savings schemes, and Bank Fixed deposits ( min 5 years duration deposits). Some income tax sections under  which we can save the tax.

Section 80C : Deduction in respect of Life Insurance Premium, Contribution to PF/EPF/PPF, NSC Bonds, Fixed Deposits etc click here to know more.

Section 80E : Deduction in Respect of  repayment of loan taken for higher education.

Section 80D : DEDUCTION IN RESPECT OF MEDICAL INSURANCE PREMIUM.

Section 10(10D) : Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy. For more details click here.

Section 80G : Deduction in respect of donations to Cretan fund, charitable institutions. For more details please click here.

Section 10(33) : Dividends from mutual funds are fully exempt from income tax under Section 10(33). Equity funds (schemes that invest 50 per cent or more of their funds in equity) are also exempt from dividend tax. This means that unlike companies, they do not have to pay tax at the rate of 10.2 per cent on the dividend that they distribute. 

INSERT (AY 2008-09) Coir Board included in Section 10(29A) and exempted from income tax.

These are some sections under which and individual salaried person can get tax benefit. there are may more other options to save the tax of self employed and business owners including these. for more details please visit income tax department of India web site. 

Under Section 80C : A person can save tax on the amount upto one lakh. By showing 1lakh savings to the department of income tax. The amounts paying towards Life Insurance Premium, Amount towards Retirement or pension schemes and so many other schemes will come under this. For more details about Section 80C please click here.

Other than these you can clime the tax savings on your interest payed to wards your home loan upto 1.5lakh, Initial stages the amount paying towards contains majority part of the interest so you can clime that amount also for tax savings, but only the problem with this is once you own a house you HR may not come under tax benefit option.