Top 4 things you must know about taxes (if you would like to pay less)

Saving taxes every year requires timely planning and systematic approach. Before you begin to save tax, you should know these 4 basic points about saving on income tax

If you pay house rent then you can use it to save tax

Many a times, we are all confused with tax calculations on House Rent Allowance(HRA) and tax benefits on home loan. Planning your HRA can go a long way in your financial planning. HRA forms part of the salary you receive from your employer and is subtracted from your gross income.

Lowest of three is deducted:

Actual HRA provided by the employer

      

      50% of basic plus dearness allowance if situated in Delhi, Mumbai, Chennai or Kolkata, 

      otherwise 40% basic plus DA

     

      Actual house rent paid, minus 10% of basic + DA

Make sure you take rent receipts from your house owner.

You can save tax and grow wealth at the same time

Certain tax saving mutual funds such as ELSS funds, EPF, PPF, NSC etc made in accordance with section 80C of the Income Tax Act give tax rebate. No tax has to be paid at the time of investing, earning and redemption, subject to a maximum limit as prescribed under section. Know more

Some expenses are tax deductible

There are certain personal expense allowances provided by your employer which are eligible for exemption from tax. Some of them are:

Medical expenses including preventive health check ups

Medical Insurance Premium

Education loan interest

Housing Loan interest and Principal

Life Insurance Premium

Dependents Healthcare

Doing good can save your taxes too

Donating to a charitable cause can help you save tax. Section 80 G of the income tax act  allows you to deduct up to 10% of your adjusted gross income by donating to certain charities.

Retirement Planning is critical

Most of us know that retirement is something we must actively plan and save toward. The traditional pension plans that pay lifetime defined benefits are becoming increasingly scarce. Yet the Indians typically don’t know how much to save and don’t save enough, according to numerous polls and experts.

Moreover, retirement today is more than just a matter of accumulating enough money. Increasing life expectancy had made retirement an extended stage of life. People can expect to spend 15 to 35 years or more in retirement. That’s a long time. What kind of retirement do you want to have? How should you spend money during retirement? How can you prepare for it and when should you start?

Getting started… Your 20s and early 30s

Early in your career is the perfect time to start a habit of saving for retirement because you have one huge advantage you will never get again… TIME. A rupee invested early in life can grow, through the power of compounding, far larger than the same rupee invested later in life. Try to save at least 10 percent pre-tax income in your plan, up to the limit the plan allows. Invest aggressively as you are comfortable with and do not cash out your retirement account at any cost.

Your 30 through your 40s

At this stage, you are likely full stride into your career and your income probably reflects that. The challenge to saving for retirement at this stage comes from large competing expenses: a mortgage, raising children and saving for their college, or perhaps financing your business.

As when you are younger, it’s critical to find a way to squeeze out rupees for retirement. Time is still on your side, though you have begun to lose some of your compounding power. Try to invest a minimum of 10 percent of your salary towards retirement.One must have adequate insurance and emergency fund set aside in a savings account to pay for fixed and essential living costs. 3 – 6 months cash emergency fund is ideal.Avoid tapping into retirement accounts for such things as home down payment or college.

Your 50s and 60s

Now is the opportunity to really sock away retirement funds. Try to boost your retirement savings goal up to 20 percent or more of your income. Ideally, you are at your peak earning years and some of the major household expenses, such as mortgage or child rearing, are behind you, or soon will be.

Investing at this stage typically needs to be a little more cautious. Time is starting to work against you, since you have few years of earning power to make up any losses. Planners recommend shifting a portion of your higher risk investments into less volatile assets such as bonds. In addition, most planners recommend maintaining a substantial exposure to stocks. You still have a lot of years ahead of you, both to reach retirement and during retirement itself. You will need some assets that can help you stay ahead of inflation and preserve purchasing power of your income.

What kind of retirement?

It’s also time to start focusing on what kind of retirement you want and what financial resources you must pay for it. Do you plan to stay home and garden, or travel the world? Work part time? Go back to school? Start a new hobby? Move to a vacation spot? This is the time to start dreaming of what your new life will look like and to start putting price tags on those dreams. Share your dreams with your spouse. It’s important that both of you explore and work out differences. What if one wants to travel and other wants to stay at home?  Calculate what realistic financial resources  you will have to pay for your retirement.

Here is an exercise for you and please feel free to share it with me on apurushothamancfp@gmail.com

Write one paragraph about the kind of lifestyle you would like to have when you retire. Include ideas on how much you think it will cost to maintain this lifestyle.

(Do you want to live on the amount of money you have been used to, more than they are used to, or less than they are used to?)