Tax Planning - All You Need To Know

It is the process of making a financial plan or situation from the perspective of tax. The objective of this process is to ensure Tax Efficiency. Tax planning means utilizing tax exemptions, benefits and deductions offered by the authorities in the most efficient way so as to minimize tax payable.

Tax planning may include planning timing of income and purchases, planning for expenditure, and size and various other things.

Objective of Tax Planning

Tax planning is one of the main focuses of financial planning. It ensures saving taxes remaining within legal limits as set under the Income Tax Act, 1961. It is the simple process of saving money by reducing the tax Burden.

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Types Of Tax Planning

Permissive tax planning: Tax planning under the framework of the law e.g. section 80C, 80D etc of the IT act.

Purposive tax planning: Tax planning having Specific objective. In this any step that the tax payer does has to have some connection with the objective to be achieved for e.g. having an apt agenda for replacement, diversification of business assets according to the residential status etc.

Long-range/short-range tax planning: Long term planning is done at the start of the fiscal year and has long term objectives.

Short term planning is done in the end of the year to reduce tax burden legally without permanent commitment.

Advantages of Tax Planning

Minimizing Litigation: If tax planning is done properly and litigation is minimized it will save a lot of resources of an individual, firm etc.

Reducing Tax Liabilities: There are various benefits that are available under the Income Tax Act, 1961, using which, money can be saved, which can be used for future purposes by the taxpayer.

Ensuring Economic Stability: Tax planning results in the money of the tax payers being saved leading to an increased flow of white money in the economy creating a positive environment for both the citizens and economy.

Control Productivity: One of the core prospects of this planning is that it allows one to channel the resources form the taxable part to wherever they are required.

Corporate Tax Planning

Corporate tax planning is the simple process of strategizing financial business affairs in such a way so as to maximise the profits accrued and minimize the taxes payable. This has to be done by taking into account the deductions, rebates and exemptions that are available. A very Central factor of tax planning is to do so while remaining within the legal limits. It has to be done carefully by experts as huge money of the corporate remains at stake.

How to Save Taxes?

There is a plethora of options to the taxpayers which are available under the various sections of the IT act, 1961. It is always advisable to make tax saving investments at the beginning of the year rather than doing those late in the year and making mistakes.

Options Under Section 80C

One of the best options available under this section is that of investing in equity-linked saving scheme (ELSS). This option offers tax savings coupled with capital appreciations apart from the options such as National Saving Certificate (NSC), Public Provident Fund (PPF), and tax-savings FDs etc.

Options Under Section 80D

In this section deductions are available on the premium paid to the Health insurance policies.

The following are the deductions that can be claimed:

1. Up to Rs25,000 on the premium paid towards health insurance for self, children, or spouse
2. Up to Rs50,000 if parents are also covered under the same health insurance plan as of the person
3. Up to Rs75,000 If either of parents belongs to the senior citizen bracket

Options, Under Section 80E

This section offers deductions on the interest paid for education loan, which can be claimed for 8 years starting from the date of repayment. This section has no upper limit on the deductible sum. Meaning that assesses can claim the entire amount of interest from the taxable income.

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House Rent Allowance HRA Exemption

This exemption is available on the cost incurred on a rented accommodation, provided that the rent receipts are furnished. The amount deducted is the least of the-

1. Actual HRA received
2. In metro cities- 50% of basic salary plus DA (dearness allowance); residing in non-metro cities- 40% of (basic salary plus DA)
3. Total rent paid less 10% of basic salary plus DA

Other exemptions and deductions available

Donations in charity- Donations in charity and other organizations are also eligible for tax exemptions.

Savings account- Some money kept in the savings account is also tax deductible; it is different for senior citizens as well as normal citizens