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Tax Planning

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What is tax planning?

Tax planning means analyzing your financial situation, from the point of view of tax efficiency. It helps a taxpayer employ tax exemptions, deductions and benefits to minimize tax liability and optimize finances.

Tax Planning is different from Tax Evasion. Tax Planning is legal, whereas Tax evasion is not. Tax planning aims at availing tax benefits through legitimate means on the lines of provisions and relaxations provided in tax laws.

 

Concepts & FAQ's Tax Planning

Tax Planning Tips In India

1. Defer income:

Deferring income is a good strategy to save tax. Deferring income means postponing your income to a future time. By deferring your income, you can claim deductions now, when tax rates are higher. These investments would mature in the future, when rates might be lower. So, you will gain today as well as in the future. Also, chances are:

  • New tax deductions may be introduced in the future.
  • Deduction limits under different Sections might be increased. Example: Section 80C has a limit of Rs 1,50,000 a year. The deduction limit might be increased in the future Union Budgets.
  • Standard Deduction was reintroduced in Union Budget 2018-2019. It might be increased in the coming years.

You may defer bonuses, income earned from a consultancy or freelance income, by investing this income in tax saving instruments like ELSS, NSC, PPF, and so on.

2. Pay off expenses on time:

Pay off your expenses on time. This allows you to claim tax deductions and also save tax. Remember to record all the expenses that you make, so that you do not forget to claim them. Deductions on expenses like insurance premiums can only be claimed in the previous year after the payment is made.

3. Plan your charity:

Yes, charity should be selfless, but that doesn’t mean you cannot avail tax benefits on charitable activities. If you think your taxable income is simply too much, plan to give some in charity. Then, claim a deduction on the same and save tax!

4.Make it a continuous process:

Tax planning should not be a one-time activity. You have a whole year to plan your expenses, investments and taxes. Therefore, keep monitoring your finances and tax planning strategies. If you find some aspects of your tax planning are going out of hand, you have time to fix the issue well in advance, rather than pay a fortune in tax or penalties.

5.Life Insurance Plans:

Avail Life Insurance Plans to save tax. They have dual benefits; you save tax in the form of premium payments and your life is insured. Be sure to buy a life insurance plan that suits your needs. Both life insurance plans (term or endowment), enjoy tax deductions up to Rs 1.5 Lakhs a year under Section 80C, on the premiums paid.

6.Invest in tax saving instruments:

You may invest in PPF, ELSS, NSC, 5 year Tax saver FDs and other tax saving investments to save tax. If you have a girl child, you open a Sukanya Samriddhi Yojana (SSY) Account in her name and make regular contributions to save tax.

Tax Planning Goals

The goal of tax planning is to arrange financial affairs so as to minimize one's taxes. Tax-planning is also as much about contributing to financial goals as it is about reducing ones tax liability. Few investment options that help us to save tax:

  • Employee Provident Fund (EPF)
  • Public Provident Fund
  • National Savings Certificate
  • Long Term Government Securities
  • Bank Deposits
  • Life insurance Products
  • Pension Products
  • Mutual Funds

Tax Planning Process

1. Compute your liabilities

The easiest and quickest way to go about tax-planning is to first get a fix on liabilities that earn a tax benefit. For example, the loan avenue over here that qualifies for a tax benefit is home loans (maximum limit of Rs 100,000 on repayment of principal). So if there is an outstanding home loan, one needs to isolate the principal amount from the interest (in the EMI) to calculate the tax savings under Section 80C.

2. Compute your fixed investments/contributions

The second logical step is to calculate your annual contribution to EPF (employees' provident fund) and life insurance premium. Add EPF's amount to your annual life insurance premium, if any. We have not considered PPF (public provident fund) as a fixed investment simply because it's not fixed as investors can choose to increase/decrease their contribution up to a maximum of Rs 1, 00, 000 (there is a minimum annual contribution of Rs 500 to keep the account active).

3. Invest the balance in suitable avenues

Once you have a fix on your liability (principal amount on home loan), EPF and life insurance contributions, you need to compute how much is still available under the Section 80C ceiling of Rs 100,000. The balance must be invested in avenues that suit your risk profile and help you fulfill your investment objectives. For instance, if you can take on risk and plan to set aside money for your child's education over the next 10 years, then investing in tax-saving funds (also known as ELSS - equity-linked saving schemes) could be the answer. If you can take on only moderate risk, then you could divide the money between tax-saving funds and PPF. The idea is that you should invest exactly where your risk appetite and investment objectives permit you to invest.

4.Monitor the process of tax planning:

Tax planning is not a one-time activity. It is a process which needs continuous monitoring and planning. Manage any surprise income like a bonus, investment maturity and emergency expenses and provide for them.

Objectives of Tax Planning:

1. Minimizing tax liability:

You (assessee) can save tax by making investments in tax-saving financial instruments, thereby saving taxes.

2. Minimizing litigation:

Proper tax planning saves you from penalties and even litigation, in case the tax department decides to take legal action against you for tax evasion.

3. Making investments productive:

Tax planning encourages tax-payers to invest in tax-saving instruments. Your money earns interest and you also enjoy the tax benefits.

4.Economic growth:

Tax planning helps pump money into the right investment avenues like tax saving financial instruments. The Government gets to use this money for infra projects and so on, leading to the growth of the economy.

Types of Tax Planning:

1.Short-term:

Short-term tax planning is made keeping in mind yearly financial goals. This helps in achieving specific, limited and short-term objectives.

2.Long-term Tax Planning:

Long-range tax planning is made for the long-term. The benefits of such tax planning are not realized immediately.

3. Permissive Tax Planning:

Permissive tax planning is done as per the provisions of tax laws.

4.Purposive Tax Planning:

Purposive Tax Planning is the exact opposite of permissive tax planning. It refers to tax planning which circumvent laws.For example, the provisions of Section 60 to 64 of the Income Tax Act, 1961, require income earned by others, to be included in an individual assessee’s total income. For example, a minor’s income is clubbed with that of the parent, who is the higher earner. As such, an assessee tries to avoid these provisions.

Importance of tax planning:

Tax planning reduces your tax liability and also offers much more.

1.Tax exemptions, deductions and a rebate can be claimed up to the date of filing income tax returns.

2. Tax planning saves you from severe penal consequences, as the law reduces the scope of tax avoidance.

3.The government provides incentives through tax laws, encouraging citizens to save tax.

4.Tax planning ensures that you plan your expenses well. For companies, it helps in capital budgeting, sales promotion and so on.

5.When interest rates are high, the amount saved in the form of taxes is as good as an interest-free loan from the Government.

6.Companies can claim repairs, renewals, depreciation on Plant and Machinery and also deduct business expenses, giving them more money to invest in the business.

7.Tax planning can reduce taxable income and capital gains. It gives you a clear picture of your savings, investments and pensions.

8.Tax planning can help with estate planning. Many investments need investors to mention a beneficiary or a nominee. This ensures that your assets pass directly to your heirs.

 

Tax Planning Articles

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ELSS: Smart Way to Save Tax

01 October 2019, Tuesday    

While tax planning may seem to be a difficult process, it is an important step to ensure minimum tax outgo. An ELSS scheme not only helps you reap the tax benefits but also provides the option to grow your money. Want to know more on Tax Planning? We at IndianMoney.com will make it easy for ....

Surcharge on Income Tax: Know Surcharge Fee and Calculations

27 September 2019, Friday    

Do you belong to the higher income tax brackets and are paying 30% income tax? You may have come across an added deduction known as surcharge. What is surcharge and why the government levies it? Let’s find out: What does Surcharge mean? Surcharge is a type of tax levied by the government ....

Standard Deduction in India 2019

25 September 2019, Wednesday    

What is the Standard Deduction? The standard deduction is a provision which states that the employees are eligible to get a flat rebate on their net income. This deduction is meant to reduce the net taxable income. The standard deduction was introduced for the salaried taxpayers under Section 16 ....

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Tax Planning News

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Home News
 

GST collections have grown 4.9 % Y-o-Y: RBI Monetary Policy

Friday, October 4, 2019, 12:46 PM

Despite GST collections coming at an 18 month low for the month of September 2019, the Reserve Bank of India (RBI) in its Monetary Policy Report states that there has been a modest year-on-year growth in the collection of the indirect tax. "Notwithstanding month-over-month fluctuations, the GST collections grew by 4.9 percent (Y-O-Y) during April-September 2019," said RBI.

Government expects Rs 40,000 crore GST shortfall

Monday, September 23, 2019, 10:58 AM

The government is expecting a shortfall of around Rs.40,000-crore in the GST-collections over what has been budgeted for 2019-20. This could put pressure on the compensation that states are eligible for in case the tax growth falls below 14% during the year. A source said the Centre had informed the GST-Council, about the expected shortfall at a time when economic growth has slowed down.
 

Corporate tax rates slashed as govt announces Rs.1.45L crore stimulus

Friday, September 20, 2019, 11:52 AM

Finance Minister Nirmala Sitharaman on Friday proposed to reduce corporate tax rates for domestic companies and new manufacturing companies ahead of the 37th GST Council Meeting. She added domestic companies would have option to pay income tax at 22% if they don't avail any exemptions or incentives from financial year 2020. This is being done to promote growth, she stated.

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Tax Planning Videos

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National Pension Scheme (NPS) - How To Save Tax With NPS | Money Doctor Show | CNN News18 | EP : 282

National Pension Scheme (NPS) - How To Save Tax With NPS | Money Doctor Show | CNN News18 | EP : 282

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How To Save Tax With National Pension Scheme (NPS)? How to claim tax benefit for an additional Rs 50,000 investment in NPS NPS gets you an extra ₹50,000 income tax deduction.
Tax Saving Investments | NSC | ULIP Plan | Part-2 | Money Doctor Show | CNN News18 | EP : 281

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Best Tax-Saving Investments Available in India (Part-2) National Savings Certificate ( NSC ) Unit Linked Insurance Plan (ULIP)

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Tax Planning Education

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What is Tax Avoidance?

Wednesday, June 19, 2019, 3:25 PM

Tax avoidance is a method of using the loopholes existing in the laws in order to save taxes. Tax avoidance is generally used by big business houses and companies who make use of such loopholes, deductions and tax rates in order to reduce the tax burden borne by these companies. Tax avoidance is done without breaking any laws or rules under the IT act.

What is Wealth Tax?

Tuesday, June 18, 2019, 3:15 PM

Wealth tax is a tax on a person's assets, on his or her net worth. It is not a tax on income, but rather on an individual's wealth. Targeting wealthy people for taxation is popular among politicians. In other words, wealth tax is a tax on what we have, as opposed to income tax, which is a tax on what we earn.

How to check ITR-V status?

Tuesday, October 16, 2018, 2:30 PM

A user can check the status of his ITR-V receipt submitted online with Income Tax Department, by entering his PAN, e-filing acknowledgement number and assessment year. The user can also check if the Central Processing Centre (CPC) has received the ITR-V and if digital signature has been used while filing.

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