How to do effective tax planning in India

How to do effective tax planning in India

Tax Planning and Objective

 

Tax planning is a legal way of reducing your tax liabilities. It helps you to use the tax exemptions, deductions, and benefits offered by the Income Tax Authority in the best possible way to reduce your liability. This is an analysis of the financial conditions of an individual/organization from the tax planning point of view. 

 

Tax planning is a kind of financial planning. The primary concept of tax planning is to save money and mitigate the tax burden with full legal compliances and requirements.

 

The best way to save tax is by working out a financial plan whenever there is an increase in your income. It is a good attitude to create tax-saving investment at the starting of the year rather than making incorrect investment decisions at the year-end. For the same, this is important to be aware of all the exemptions and deductions provided by the Income Tax Authority.

 

Income Tax Rate & Slab for Individuals 

Individual (Other than NRIs), with age less than 60 years on the last day of the previous year.

 

 

Under the new tax regime introduced in 2020, individuals may opt to pay taxes at lower rates with new income tax slabs by ignoring the various deductions and exemptions provided under Income Tax Act.

 

Advantages:

 

Avoid litigations: Often disputes arises between Income Tax Department (ITD) and individuals as the ITD tries to extract the maximum possible tax while the Individuals wish to keep their tax liabilities lower. Avoiding litigations saves the taxpayer from legal disputes with Department.

 

Minimize tax liabilities: Every taxpayer desire to reduce their tax liability and increase savings for the future. We can reduce our payable tax by investing our funds within multiple benefits offered by the Income Tax Act. The Act provides various investment schemes which may reduce our tax liability.

 

Productivity Leverage: Important tax planning objective is diverting funds to income-generating plans by using tax saving schemes. This will give dual benefits of Tax savings and Income generation. 

 

Possible Methods of Tax Planning

Tax planning is not merely a tax-saving process that will reduce tax liability but also investing the money in the right manner to leverage its productivity.

Following are the various methods of tax planning:

 

Short-Term: We use this method to reduce our tax liability at year-end. Individuals plan to this method to reduce tax liabilities as per Income Tax laws at the end of the financial year. This method is not suitable for long-term commitments. However, we can attract tax savings substantially with this method depending on our financial model.

 

Long-term: Best plan to be worked out at the beginning of the financial year and follow till year-end as planned. Unlike short-term tax planning, we may not offer immediate tax savings but will prove useful in the long term.

 

Permissive tax planning: This involves planning under the Indian taxation laws as provided in the Income Tax Act by way of various exemptions and deductions. For example, U/s 80C of the Income Tax Act offers various types of deductions on various Investments and Expenditures.

 

 

How to save taxes

Taxpayers are provided with various options to lower their tax liabilities. Many sections and clauses of the Income Tax Act offer tax deductions and exemptions, viz., Section 80C is the well-liked tax-saving tool. For e.g., Deposit in PPF, Bank deposit for 5 years, Investment in ELSS (Mutual Funds, etc.), Insurance, House Loan repayments, and School Fee for children. We may save up to Rs 46,800 on taxes while claiming up to Rs 1.5Lakh in a year, (Considering we fall under the 30% Tax bracket with 4% S.H.E. Cess).

 

Section 80D: Taxpayers are provided deductions on the premium paid for health insurance for an amount up to Rs 75000 and can save tax up to Rs. 23400.

 

Section 80E: This section provides tax deductions on the interest paid on education loans taken for higher studies from scheduled banks. This deduction can be claimed for eight years from the date of repayment starts. Here is no threshold limit on the deduction amount and hence we can claim the whole amount of interest paid to the bank. 

 

House Rent Allowance (HRA): Individuals can avail exemption on the rent paid to the landlord for accommodation. The taxpayers are required to provide the rent receipts with PAN details of the landlord, however not required for up to Rs 1 Lakh rent paid during a year and hence we can claim this amount without the required details and documents. 

 

Rebate U/s 87A: An individual taxpayer, who is a resident of India as per definitions of income tax laws, can claim a tax rebate of up to Rs. 12,500 against his tax liability if your income does not exceed Rs. 5 lakhs. If Income is crossing this threshold of Rs. 5 Lakhs this benefit is not available.

 

Other Exemptions and Deductions: Apart from the provisions discussed above, we can save tax in various different ways. Donations to charitable and religious trusts and other recognized organizations like political parties and others, also eligible for tax exemptions.

 

Income tax planning, if worked out within the defined rules of Income Tax laws in India, is a smart decision and legal of course. However, you might be in trouble by following tax evasion techniques. Our duty is to plan taxes prudently. You can choose from various tax-saving plans available in the market like mutual funds, insurances, and many other investment options available to you. 

 

Courtesy Ankit Aggrawal (FCA). Ankit is a renowned tax consultant and planner.

If you are looking for further help with financial planning you can contact at anvikconsultants@gmail.com

 

 

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