Taxes in India consume a significant part of your income. Without proper tax planning, this compulsory contribution can eat up a huge bite of your hard-earned money. Fortunately, there are tools out there to help you reduce your tax liability. But what does it include and how can you go about it? We’re here to explain tax planning.
What is tax planning?
Tax planning refers to financial planning for tax efficiency. This allows you to maximize the effects of tax exemptions, discounts, deductions, and statutory benefits. In general, tax planning involves formulating financial and business decisions in order to minimize the income tax you owe the government as much as possible.
For the layperson, tax planning is simply a means of saving money by investing in tax saving instruments under various sections of the Income Tax Act 1962. It requires planning your finances and taxes at the beginning of the tax year rather than leaving it until the last month, week, day, or hour. Tax planning for each individual depends on subjective factors including age, income, financial goals and risk tolerance.
What are the goals of tax planning:
Why plan your taxes ahead when you can easily defer it until the end of the fiscal year? The goals and purpose of tax planning go beyond saving a few meager dollars. Here is how.
1. Reduce your tax liability
Tax planning is essentially about reducing your tax liability. Every taxpayer wants to reduce the tax burden and save their hard earned money as future savings. Fortunately, the government offers several different investment programs that can significantly reduce tax liabilities. Therefore, it is important to plan your investment in tax saving instruments and take advantage of all the benefits to reduce the state’s tax liability.
2. Minimizing litigation
An important aspect of tax planning is minimizing litigation. This means settling tax disputes with local, state, or state tax authorities. There are often disputes between tax authorities and taxpayers because both pursue opposing goals. One tries to squeeze as much tax out of the other as possible and the other tries to save as much tax as possible. Minimizing litigation will save you from all of the judicial harassment and court kachehri troubles.
3. Leverage productivity and financial growth
In addition to reducing tax debts and litigation, tax planning also boosts your economic growth. This involves channeling your income from various sources over specific schedules and investing in tax saving and income generating tools that are right for you. This helps you to create a nest of funds, to put money aside for productive purposes and thus to contribute to your economic growth.
4. Stabilize the country’s economic health
The taxes paid constitute the government’s retained earnings. When taxpayers pay all statutory taxes, they are contributing, directly and indirectly, to creating a more productive economy. Thus, tax planning is beneficial for you and your home country.
What types of tax planning are there?
Because tax planning involves investing in the right tools at the right time to meet your short, medium, and long term financial goals, there are broadly four methods of tax planning.
1. Short-term tax planning: Planning of tax payments, which is designed and executed at the end of the fiscal year. Investors resort to this type of tax planning after the end of the fiscal year to find ways to legally reduce their tax liabilities. Short-term tax planning does not include long-term obligations, but it still promises significant tax savings.
2. Long-term tax planning: Executed at the beginning of the financial year that the taxpayer tracks throughout the year. Such a regulation may not necessarily offer immediate advantages as short-term tax planning. However, as the name suggests, it can prove to be valuable in the long run.
In simple language, short-term planning usually takes place towards the end of a financial year and long-term planning at the beginning. Dead easy.
3. Free tax planning: This includes planning investments according to various provisions of the Income Tax Act. There are many legal provisions that offer exceptions, deductions, incentives, and contributions. For example, the most popular section 80C of the Income Tax Act of 1961 provides various types of tax exemptions (on the amount invested, the interest income, and the amount at maturity) as tax-saving investments.
4. Objective tax planning: Objective tax planning refers to the facility with a specific goal. This involves the precise selection of investment instruments, the creation of a suitable agenda for the replacement of assets and / or for the diversification of income and business assets if necessary based on your residential status.
What different tax planning tools are available?
In addition to simply investing in one of the available tax-saving instruments, you can also use these tax-saving instruments for careful tax planning. Here are some of the most popular tax saving tools:
Section 80C of the Income Tax Act: Deduction Limit up to Rs. 150,000 / –
Any natural person or a Hindu undivided family (HUF) can effectively invest in tax saving instruments in order to optimally reduce their tax liability. This is considered to be one of the most sought after sections when it comes to tax planning.
Here are some tax saving instruments that fall under Section 80C:
Big risk takers
Big risk takers
|Equity Linked Savings Scheme (ELSS)||Non-unit-linked insurance plans (term life insurance, endowment life insurance, money-back plan)|
|Pension funds||Public pension fund (PPF)|
|Unit-Linked Insurance Plans (ULIPs)||National Savings Certificate (NSC)|
|National Pension System (NPS)||5-year fixed-term deposit at the tax savings bank|
|5-year fixed-term deposit for post offices|
|Seniors Savings Program (SCSS)|
|Like samriddhi account|
Other helpful 80s
|80CCC||Contribution to the pension fund of the life insurance company or another insurer in accordance with Section 10 (23AAB)|
|80CCD||Contributions to the national pension system reported by the central government.|
|80CCG||Rajiv Gandhi Equity Saving Scheme (RGESS)|
|80D||Health insurance premium paid|
|80DD||Maintenance, including medical treatment, of a disabled relative who is a person with a disability|
Medical treatment expenses
|80E||Loan interest for a degree|
|80G||Donations to certain funds and charities|
|80GG||Rent paid for home ownership|
|80GGA||Certain donations for scientific research or rural development|
|80GGC||Contributions to political parties or electoral foundations|
|80TTA||Deduction of interest from savings bank balances|
|80U||Person who suffers from one or more specific disabilities|
Tax planning is a legally wise decision if it is carried out exactly in the framework set by the tax authorities. You can choose a specific tax-saving investment vehicle based on your income tax plate, lifestyle choices, and social obligations. We recommend using the services of an auditor or a lawyer. However, there are many resources online and on IIFL to learn more about tax planning.