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Tax Planning

Tax Planning is an activity conducted by the tax payer to reduce the tax liable upon him/her by making maximum use of all available deductions, allowances, exclusions, etc. feasible under law. In other words, it is the analysis of a financial situation from the taxation point of view. The objective behind tax planning is insurance of tax efficiency. Tax planning allows all elements of the financial plan to function in sync to deliver maximum tax efficiency.

Tax planning is critical for budgetary efficiency. A reduced tax liability and maximized the ability of retirement plans.

Objectives of Tax Planning

  • Minimal Litigation: There is always friction between the collector and the payer of tax. In such a situation, it is important that the compliance regarding tax payment is followed and used properly so that friction is minimum.

  • Productivity: Among the most important objectives of tax planning is channelization of taxable income to various investment plans.

  • Reduction of Tax Liability: As a tax payer, you can save the maximum amount from payable tax amount by using a proper arrangement of your enterprise working as per the required laws.

  • Healthy Growth of Economy: The growth in an economy depends largely upon the growth of its citizens. Tax planning estimates generation of white money that is in free flow.

  • Economic Stability: Stability is supplemented when the tax planning behind a business is proper.

Types of Tax Planning

  1. Short-range and long-range Tax Planning: The tax planning which is done annually to arrive at specific objectives is called short-range tax planning. Whereas, long-range tax planning does not include immediate pay-offs of any kind.

  2. Permissive Tax Planning: Here the planning conforms to law provisions of tax.

  3. Purposive Tax Planning: This is the tax planning method that is based on loopholes in the laws.

Tax planning is a term that stands for calculated application of tax laws, so as to effectively manage a person’s taxation. Leading to avail the tax benefits as per the law and in accordance with the interest of the nation and its people.

Tax Planning in India

Indian law offers a variety of tax saving options for the taxpayers, allowing for a large range of options for exemptions and deductions through which you could limit your overall tax output.

  • The deductions are available from Sections 80C through to 80U and can be utilised by eligible taxpayers.

  • All these deductions happen against quantum of tax liabilities.

  • There many other sections under the Income Tax Act, 1961 such as exemptions and tax credits that can lower your tax liabilities.

Corporate Tax Planning

This is a way of lowering the liabilities on a registered company. One of the most used methods is by including the deductions on business transport, health insurance of employees, etc. With tax deductions and exemptions provided under the Income Tax Act, 1961, your enterprise can largely reduce its tax burden in a legal way.

Rising profits of an enterprise means higher liabilities of tax. In such a situation, it is important that they dedicate enough time on tax planning that reduces liabilities. With a tax plan, both direct tax and indirect tax is lessened at the time of inflation. Not just this.

Tax planning means a proper planning of:

  • Expenses.

  • Capital budget.

  • Sales and Marketing costs.

A good tax planning results from the following

  • All you need to do is to claim the tax benefits is invest in eligible instruments.

  • Giving correct information to relevant IT authorities.

  • Being well informed of applicable tax laws and court judgements on the same.

  • Tax planning should be done completely under the purview of law.

  • Planning should take into consideration business objectives and flexibility for the incorporation of future changes.

  • You could be a long-time taxpayer or a first-time payer, in case you did not plan your taxes properly, you are probably paying more in tax than you should.

  • Income Tax clauses seem so complex that the common man is averse of dealing with taxes.

This is the arrangement of a tax payer’s business or financial dealings, in such a way that complete tax benefit can be availed by legitimate means, so that the amount of the tax is minimal.

Common mistakes people make regarding income tax

  • Procrastination: This is the root of all follies you will make as a tax planner. This will eventually lead to you paying more taxes, instead of making timely investment leading to optimum planning of taxes.

  • Investing in insurance products for tax saving: When approaching the last of a financial year, a lot of us receive phone calls from insurance companies that insist that you buy an insurance policy that saves tax. This isn’t one of the wisest things to do.

  • Power of compounding through tax saving mutual funds: Many people don’t consider the power of compounding despite all supporting factors.

  • Failing to optimise all available options for tax saving: Don’t be the person who believes that tax planning starts and ends with Section 80C of Income-tax Act, 1961- that only describes investment instruments for saving tax.

Generic Saving Methods in Tax Planning

Let’s talk about tax saving expenses. We end up paying tax on various expenses which are otherwise eligible for tax benefits that we fail to grasp due to ignorance about them. Read on to understand some such expenses where you can save tax.

  • Medical expenses of disabled dependent: For a dependent person in your family who has a disability, there is tax benefit under section 80DD. This tax deduction is a social support for disabled family member from the government, so as to ease that person’s dependence on you. This means a saving of up to Rs 1,25,000 on the taxable income.

  • Expenses for a disabled individual: Same as section 80DD deductions. A person who has disability gets benefit through section 80U. Maximum deduction is INR1,25,000.

  • Treatment of specified diseases:

    • Treatment of diseases like cancer and AIDS is very expensive and Section 80DDB offers the much needed financial relief to the person suffering from such ailment and his family members.
  • Charitable donations:

    • There is another reason to rejoice when you make donations. Besides supplementing your good deeds, you also gather the right to claim another tax exemption covered under section 80G.

    • There is an upper limit on cash donations. Such donations are capped at Rs 2,000.

  • Donations for scientific research or rural development:

    • Donations towards scientific research are open for deduction through section 80GGA.

    • There are some other situations too where you get to save tax.

FAQs

Can I claim HRA deduction on rent?

  • Yes. When you look at your salary carefully, you will find that it has a component called HRA.

  • This allowance can be claimed as a tax deduction, if you live in a rented place.

What should I know about travel expenses and LTA deduction?

  • LTA is that segment of your salary where you can get you tax benefits for sure. This concession can be availed for two journeys in a four-year period.

  • Expenses incurred by you & your family on travel for which your employer gives LTA can be claimed as deduction.

I recently donated to a political party. Should this reflect in my tax plan?

  • You may not know this but supporting politics can also reduce the burden of your taxes.

  • Any donation made to political parties is exempt from tax, if it satisfies certain conditions under section 80GGC.

Are there any tax exemptions on gratuity?

  • Any gratuity that you get upon retirement/ incapacitation / termination / widow of the deceased person etc. has been given exemption up to Rs. 10,00,000.

What is the tax policy on coupons for Meals?

  • Some employers provide meal coupons like Sodexo to their employees. These aren’t taxable up to Rs 2,600 p.m.

Where do medical expenses figure in my tax planning effort?

  • It is beneficial to keep the receipts of medical expenses safely to save tax.

  • You can gain tax benefit of up to Rs 15,000 on medical expenses for yourself and your dependents.

Read More About Tax

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