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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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What is Dearness Allowance? Employees working for the government in the public sector, receive salaries that are divided into several components. Dearness allowance is an essential component along with other components like basic pay, provident fund, gratuity and so on. Dearness allowance is paid ....

What is Tax Avoidance?

21 May 2019, Tuesday    

Tax avoidance involves the process of managing finances in a way by which the individual is able to reduce his tax liability. Tax avoidance is a method of exploiting the laws to one’s advantage. Tax avoidance has benefitted a large number of entities starting from small business houses to larg ....

Road Tax Rules and Regulations in Karnataka

15 May 2019, Wednesday    

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Tax Planning News

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GST collection scales record high of Rs 1.13 lakh crore in April

Wednesday, May 1, 2019, 6:08 PM

The Goods and Services Tax (GST) collection in April touched Rs.1.13 lakh crore, the highest since the nationwide levy was rolled out in July 2017. The revenue in April is 16% higher than the monthly average GST revenue of Rs.98,114 crore in 2018-19. This is the fifth time the collections crossed Rs.1 lakh crore since GST rollout.

GSTN to use ITR information to spot evasion

Tuesday, April 30, 2019, 5:05 PM

Soon, the tax department will be sharing the income tax return (ITR) data of business persons with the GSTN officer. The move is aimed at spotting income anomalies or mismatches between their GST returns and ITR. This move will apply for all those assessees who have business income and file the returns specified for those with this income i.e. ITR 3 to ITR -7.

Govt extends deadline for GST sales return for March until 23 April

Sunday, April 21, 2019, 9:36 AM

The government has extended the last date for filing summary sales return, GSTR-3B, for March month by three-days until April-23. According to the source, "Glitches in GSTN is leading to frequent extensions in the filing of tax-returns. Tax filers also need to improve the habit of filing at the last date, leading to burden on the servers resulting in the collapse of the same."

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Tax Planning Videos

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Tax Planning Education

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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.

What is Form 26 AS?

Wednesday, September 19, 2018, 4:58 PM

Form 26AS, also called as Annual Statement, is a consolidated tax statement which has all tax related information (TDS, TCS, Refund etc) associated with a PAN. It shows how much of your tax has been received by the government and is consolidated from multiple-sources like your salary/ pension /interest income etc. This form contains the annual tax-statement under Section-203AA and Rule 31AB.

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