A growing income is a part of everyone’s dreams. But realizing this dream also comes with the liability to pay a higher tax. Each year, we are reminded by our employers or tax professionals about filing the income tax return on time. For that, we need to look into our investment portfolio, check the life or health insurance premium paid, and gather details of other tax-saving investments. Doing it all only gives us an idea about the possible tax savings. A better way to plan for saving tax is to use online income tax calculators designed to help individuals plan for taxes.
Let us discuss more about using a tax calculator to maximize tax savings.
What is an Income Tax Calculator?
It is an online tool used by individuals and tax professionals to calculate income tax payable as per the prevailing laws. It can be considered a modern, advanced alternative to manual tax calculations that were done in the past. The purpose of using these calculators is to get an approximate figure of taxes to be paid, which helps plan for higher tax savings accordingly. They use the details you enter about your income, eligible tax deductions, HRA exemptions, and others to give an estimated value.
Steps to Use an Online Tax Calculator
You can easily find tax calculators online at different portals, each of which may slightly differ in terms of tax calculation steps. Given below are the common steps of using a tax calculator to get an estimate:
- Visit a reliable portal and access their online tax calculator.
- Choose the financial year to calculate taxes – the current one being 2019-20.
- Enter your personal details, such as name and age, in the respective fields.
- Enter income from various sources – gross income from salary, income from interest, and income from other sources.
- Enter the details of tax-saving investments that you made in the chosen financial year. As per the details you enter and the corresponding sections of the Income Tax Act, the tax calculator considers the eligible deductions.
- You can choose to get the taxes calculated based on the old or new tax regime.
Before you use a tax calculator, you should know that proper tax planning requires careful calculation of taxes. A minor mistake can minimize the amount of tax you can save in a specific financial year. Hence, it is advisable that you also seek advice from a reliable tax professional and plan for taxes accordingly.
Common Terms You Should Know While Using a Tax Calculator
- Financial Year
The period starting from April 1 of a specific year to March 31 of the next year is called a financial year. This is the period in which you need to make tax-saving investments to become eligible to save tax.
- Assessment Year
It is the period in which the income of the last financial year is assessed, hence the name. For example, for the financial year 2019-20, the assessment year for tax calculation and payment will be 2020-21.
- Deductions
It refers to the reduction in your taxable income as per the provisions defined in the Income Tax Act. It is because of these deductions that you can maximize tax savings. You are asked about these deductions when using online tax calculators.
- Exemptions
Tax exemption is the reduction of a tax liability that is otherwise imposed on the individuals. It may provide complete relief from taxes as per the laws defined by the Government.
- HRA Exemption
House Rent Allowance, commonly known as HRA, is a part of employees’ salary from both public and private sector organizations. It makes individuals eligible for tax exemption under Section 10(13A).
Ways to Maximize Tax Savings in a Given Financial Year
- Calculate Taxes Carefully
Tax calculation is a crucial part of planning for taxes. Whether you use an online tax calculator or get it done manually, it is important to do it carefully and avoid possible mistakes. A minor mistake may increase your tax liability, realizing which later would make you go through the tax refund process.
- Invest Right
The amount of money you invest in tax-saving instruments also helps increase tax savings. For instance, if you buy a term plan, then the term insurance tax benefits under Section 80C will reduce the tax payable as per the premium you pay. You can increase such tax savings by opting for a higher sum assured, which requires you to pay a higher premium.
- Get Tax Advice
As a working or self-employed individual, you might not know all about various ways to save taxes. While you can file an income tax return online on your own these days, it would be best if you seek help from a tax professional before doing so.
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