RAGS TO RICHES | Create Your Tax Plan in 4 Easy Steps

A monthly dose of finance for creative professionals, freelancers, artists, heavily aided by stories, puns, memes and examples. 

Written by Ragini Singh Khushwaha, founder of ArtNowThus and subject matter expert on the arts, media and content, cats, random factlets from around the world and productivity hacks. 
With inputs from Sakina and Husein Merchant, Chartered Accountants who attempt to bring out their best selves by combining their professional skills and their love of being around and learning from other creators.

The reason personal finance is so tricky to write about (and therefore can feel tricky to understand) is because by its very nature it is unique to each individual. And the same holds true for a tax plan - the final plan and breakdown will be unique to you and your situation. But the basis of it all, lies in one universal truth - that all people want to pay as little tax as possible. 

The bad news here is that there will always be taxes to pay. The good news is there are perfectly legal ways in which you can reduce your tax. And the first step to reducing your tax is actually knowing what it is. Tax is a mandatory fee levied by a government to its citizens - and ideally used by the government to then fund various expenses to make overall public life better. You might disagree with the extent to which this happens, but nonetheless this is what it is.

A big factor in the definition of tax is that it is a mandatory payment. So regardless of how annoying we find it or how tempted you are to avoid filing/paying your taxes - there is just no legal way out of it. If you’re lucky enough to earn over 2.5L a year (yay new tax regime), you’re going to be paying some taxes.

Probably Relevant Side Note: A tax regime is the official term for all those rules and laws governing how we pay tax. In 2020, the government introduced a new tax regime which altered the tax slabs. Tax slabs are the various levels of income through which we determine how much tax we pay - the higher the income, the higher the tax percentage slab you’re in. 

After the introduction of the new tax regime, any income earned above 2.5L a year is taxable. Anything below that is not. (In the old regime this number was at 3L per year 🤷🏽‍♀️.)

There is of course all the tax we pay on things we consume - products or services. But where we feel the pinch of taxes the most is when it comes to paying our income tax. Now I’ve done my time with my income below the taxable limit (which is where the personal finance budget-saving genius comes from - a girl’s gotta learn to make a buck strrretch!), so the first time I had to actually pay income tax - it really annoyed me. And then it really confused me. Until I finally decided to take the bull by its horns and built my first comprehensive tax plan (which took me like two hours to figure out after a month of stressing over it #productivityqueen).

Very simply,

a tax plan helps you assess your finances at the start of the year so that you can plan your life for max tax (heh) efficiency

Since you’re being taxed on your income, the first step is to figure out your total income for the year, and know where it’s all coming from. I didn’t bother to keep track of this for years, and it would be the most frustrating part of my tax filing eventually. If you have one single source of income, which is a salary perhaps and is therefore fairly regular to track - it’s not a big problem. But when there are more sources of income - say rent from some property you own or interest that you’re making from an investment - it’s good to know where everything is coming from and how much of it is coming in. In my case I have a CA who helps me with my taxes, so I make sure I give him a heads-up as well and it just smoothes out the entire process especially at the end. 

Probably Relevant Tip: The easiest way to identify your sources of income if you don’t just know it off the top of your head is to look through the credit column in your bank statement over the last year. It’s much shorter than the debit column, so it’s really not all that tedious and will give you an accurate idea to base the current year off.

Now that we have the income end sorted out, let’s talk about expenses. The cool thing is that there are a bunch of expenses that can be claimed for a tax deduction - you just need to know where to look.

A tax deduction is a reduction of your income that is able to be taxed. The government allows you to claim certain expenses as a tax deduction - what this basically means is that if you inform the government about certain expenses (for example your house rent) that you are making, they will deduct that amount from your total taxable income. This reduces the amount of your income being taxed and therefore reduces the amount of your tax. In the utopia of my imagination, every expense I ever make is tax deductible and my life is tax free forever and ever. In the real world there is a certain percentage of certain expenses that I can claim as a valid tax deduction.

Depending on whether you are a salaried employee or a freelance professional/business owner the expenses you can claim vary. If you are an employee with a salary, make yourself super familiar with your payslip and the break-up of your overall income. It’s the best way to know of any allowances in your salary that can be claimed as expenses. Once you know the allowances you will be claiming, speak to your CA and they can explain to you how best you can maximise your claims for the most tax benefit.

Probably Relevant Side Note: In the case of a salaried employee, the government allows for employers to deduct a portion of your salary from the total of your taxable payment. This is called a Standard Deduction. As of 2019, the Standard Deduction limit has been increased to Rs.50,000 annually. This is a good one to know while making note of your exemptions as well.

Probably Relevant Side-Side Note: “Speak to your CA” is the holy grail of my tax advice but I don’t think it’s necessary that you absolutely need to have one. If you’re new to this stuff though, it’s always good to have someone you can call to help with the slightly trickier calculations when it comes to your taxes and planning for your exemptions.

If you’re filing your taxes as a freelancer or a business owner (which is what I do - your taxes in this case are filed under the head ‘business/professional'), a LOT of your personal expenses are eligible to be taken as company/work expenses. Again “speak to your CA” and find out what expenses you can claim. Some examples of expenses that you can claim are rent (if you’re working from home), travel costs for meetings, F&B charges that occur in the course of work/meetings, internet charges, car loan interest, your phone bill, courier charges - the list can be endless but must pertain to expenses incurred for work.  Once you know this, just make sure you keep track of these with bills and any other records, so that it just eases the process towards the end when you are filing. 

So now that you know what your total income is going to be for the year and how much of that can be legally filed away under expense claims never to see the light of tax, it’s time to get that tax liability even lower.

Meet your new best friend - Section 80C!

Section 80C of the Income Tax Act of India is a clause that allows for certain expenses and investments to be tax exempt up to Rs.1,50,000. So obviously maxing this out is a great way to save tax. And because it’s such a great tax saving tool, it’s obviously very popular and there are a whole lot of investments that you can make that will be eligible for this deduction - PPF investments, life insurance, tax saving mutual funds (also known as ELSS), tax saving FDs - to name a few. I generally make my investments for this to my PPF account - mostly because it’s an incredibly safe instrument and once upon a time my dad told me to do this and it stuck. But if you’re up to doing some research of your own, find out what are the various investments you can claim under the 80C and see what works best for you. You could go for a slightly riskier investment with a higher interest rate. Or you may realise that you have some expenses (like a home loan) that are eligible for the deduction and that you may not need to invest the entire amount for the full benefit. Like I said, this will be personal to you but with a little research (and this article by your side) it’s a cakewalk to figure out once you give it a little time.

Probably Relevant Side Note: I came across this great tax calculator on a Cleartax blog page while researching for this article. It’s great to identify how much you need to be investing in order to get the most out of this deduction. It’s also really fun to just play around with and calculate what your tax payments are going to look like. Or just create random make believe situations and see how little tax you can pay. Enjoy.

Once you know exactly what your potential tax liability is going to be, all you now need is to know what portion of this tax is being deducted through the year - what we lovingly know as TDS or Tax Deducted at Source. Whatever the source of your income (for the most part* - terms and conditions of course apply, like they always do), there is some percentage (usually about 10%) of it that is likely being deducted regularly towards TDS.

Best case scenario, putting together your tax plan and being aware of what your liabilities are could maybe allow you to notify your employer and actually reduce the percentage of TDS being deducted, if it’s surpassing your total tax payment. This is great for liquidity, it means less tax cut at source so more money in the bank for you.

Worst case, you know how much tax you’re going to have paid in advance, so you know the amount you’re going to shell out at the end of your filings. Win-win really.

Probably Relevant Side Note: In case you want to check that your TDS deductions are actually making it to the government coffers you can look through what is called the Form 26AS - this is a statement that provides information on any advance tax paid. I’m also in love with Cleartax and their portal and their blog - it’s a goldmine of information. Here’s where you can read up on the Form 26AS including how to go about downloading it for yourself.

So there you have it. All that you need to create that tax plan that would even impress the toughest audience - your folks! 

All-in-all if you are still paying tax at the end of this all, it’s not really the worst problem to have - it’s a sign it’s going to be a pretty alright year financially.

Happy taxing!

ENDNOTE AND DISCLAIMER

Rags to Riches is a monthly column published for the ArtNowThus Blog and Newsletter. Meant for creative professionals, freelancers, artists - anyone really who hasn’t yet quite figured it out and needs a place to start from scratch. 

All Rags to Riches articles are put together with the help of experts, and heavily aided by stories, puns, memes and examples - this is a finance blog you will actually want to read and (hopefully) put to use in your personal finance lives.

We’d like to establish that while the principles outlined in this section should pertain to anyone, we’ve put this together with a focus on creative professionals and freelance workers. Also, while we do have Husein and Sakina consulting with us on this column and keeping us straight, we’re not financial advisors. This column is for informational and recreational purposes only and in no way meant to offer advice or recommendations.