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When the charm of a salary hike is deflated by a higher tax bracket

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It is often at the end of the financial year, when you sit with your chartered accountant to file your ITR (Income Tax Returns) that you find out that a large amount of deduction was made from your earnings through Tax Deducted at Source (TDS).

If you have ever been puzzled by how all those taxes were charged on the money you made, you are not alone. It is famously believed that Albert Einstein once told his friend Leo Mattersdorf, the man who performed tax accounting work for him, "The hardest thing in the world to understand is income taxes."

When the charm of a salary hike is deflated by a higher tax bracket

If a genius like Einstein was confused by tax calculations, you are most likely bound to too. However, it goes to show that your accountant could lose or save you valuable money with tax planning.

With an appraisal comes the dread of tax deduction

It is even more baffling that the more money you make, the higher the tax you pay. So if you've been working all year to receive that coveted annual hike, you need to devote some time for tax planning at the start of a year, to save on what you pay the authorities. You do not want the reward for your long hours at work to be diminished by the burden of higher income taxes.

To avoid tax shocks after the financial year has ended, it is always wise to plan ahead with an orderly strategy than simply availing the benefit of standard deduction.

What can you do?

Ramesh Shukla, a mid-level executive's salary in hand each month has been Rs 28,915. He is expecting a salary hike of Rs 6,000 per month from January 2020. The account team at his office has informed him that unless he shows some investments in tax-saving schemes, his February and March salary will be drastically reduced.

There are two primary ways to reduce tax out-go: 1) reducing taxable income 2) increasing deductions. Fortunately, the two go hand-in hand. You can bring down your taxable income by making contribution towards investments that come with deduction benefits.

Ramesh had no option but to immediately take out a health insurance for himself and his parents. The premium outgo saved him tax on Rs 50,000 out of his annual premium under 80D. If he had saved prudently throughout the year, he could have invested in ULIPs and other schemes that would reduce his tax component upto Rs.1.5 lakh annual income under section 80C of the IT Act.

You could purchase life insurance policies that also come with returns-earning benefits. Products like ULIP from a trusted life insurance company like HDFC Life are approved by the government for tax benefits. They offer the dual benefits of returns alongside insurance, which make ULIPs very unique.

Using tax-saving tools like these, you can seek insurance benefits while saving money on tax out-go.

When the charm of a salary hike is deflated by a higher tax bracket
When the charm of a salary hike is deflated by a higher tax bracket

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