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Importance of Corporate and Individual Tax

Importance of Tax Planning for Corporates and Individuals

Tax planning is an integral activity conducted by every person earning through salary, professional or other activities and organizations in India. Tax planning is crucial for budgetary efficiency. It facilitates the smooth functioning of the organization for corporates; a sound financial plan is a must in order to deliver maximum tax efficiency. In addition, paying taxes is a method of contributing towards the country’s development.

During every financial year assessment, be it individual or corporates files taxes and submits the same to the Income Tax Department of India.

Tax Planning in India

The Government of India has provided a list of deductions which can be availed by every individual for saving taxes. It is advisable to take benefit of the following deductions:

  1. Deductions available under Section 80C to Section 80U of the Income Tax Act, 1961
  2. The deductions assist in mitigating tax liabilities which would, otherwise, be directly deducted from the taxpayer’s income
  3. In addition to tax deductions, there are tax credits which can be obtained by engaging in environment friendly activities

Corporate Tax Planning

Tax planning for corporates comprises of means for reducing companies tax liabilities. The simplest way to achieve this is by taking into account expenses made on health insurance of employees, office expenses, business transport, employee child care expenses, charitable contributions retirement planning, etc.

By taking full benefit of various tax deductions and exemptions available under the Income Tax Act, 1961 corporates can considerably bring down their tax burden. Higher the growth of the corporate firm means growing profits of the corporate house resulting in higher taxes for the corporate firm. Under such a scenario a proper corporate tax planning activity it becomes of extreme importance. Corporate firms account team must take into account all the available sections of the income tax act, 1961 to bring down their tax burden. Proper and efficient tax planning activity by a corporate house leads to a reduction in payment of their direct and indirect taxes.

Advantages of Tax Planning for Individuals

Here are the key advantages of tax planning:

  1. Tax planning facilitates the smooth functioning of the financial planning process
  2. Compliance regarding tax payment reduces legal hassles
  3. Tax planning helps channelize taxable income to various investment plans
  4. Tax planning helps you save money
  5. Tax planning enables corporates to contribute towards the economic growth of our country
  6. Promotes economic stability

Deductions under Section 80C of the Income Tax Act, 1961

Here is the list of common deductions available under Section 80C:

SectionDeduction onAllowed Limit (maximum) FY 2018-19
  • Investment in PPF
  • Employee’s share of PF contribution
  • NSCs
  • Life Insurance Premium payment
  • Children’s Tuition Fee
  • Principal Repayment of home loan
  • Investment in Sukanya Samridhi Account
  • ELSS
  • Sum paid to purchase a deferred annuity plan
  • Five-year deposit scheme
  • Senior Citizens savings scheme
  • Subscription to notified securities/notified deposits scheme
  • Contribution to notified Pension Fund set up by
  • Mutual Fund or UTI
  • Subscription to Home Loan Account scheme of the National Housing Bank
  • Subscription to deposit scheme of a public sector or company engaged in providing housing finance
  • Contribution to notified annuity Plan of LIC
  • Subscription to equity shares/ debentures of an approved eligible issue
  • Subscription to notified bonds of NABARD
  • Rs. 1,50,000
    80CCCFor amount deposited in annuity plan of LIC or any other insurer for a pension from a fund referred to in Section 10(23AAB)
    80CCD(1)Employee’s contribution to NPS account (maximum up to Rs 1,50,000)
    80CCD(2)Employer’s contribution to NPS accountMaximum up to 10% of salary
    80CCD(1B)Additional contribution to NPSRs. 50,000

    The list mentioned above is not exhaustive, other sections which can be availed to save taxes are: 80TTA(1), 80TTB, 80GG, 80E, 80EE, 80CCG, 80D, 80DD, 80DDB, 80U, 80GGB, 80GGC and 80RRB.

    House Rental Allowance

    One of the most common modes of saving income tax is by paying rent. Individuals staying in rented accommodation can avail the benefit of HRA exemption (Section 10 (13A) of the Income-tax Act, 1961). The amount eligible for deduction depends on the following criteria:

    1. Total HRA received
    2. Total rent paid reduced by 10% of their basic salary
    3. 40% of the basic salary for taxpayers residing in non-metro cities and 50% of the basic salary for taxpayers living in metro cities

    In conclusion, it is advisable to pay taxes regularly. Tax saving investments not only help in limiting the income tax but also act as a source of wealth creation over a long period of time. For corporates, proper tax planning helps in adequate management of expenses, proper allocation of the capital budget and bringing down sales and marketing costs, among others.