Tax Planning - Importance and Benefits of Tax Planning

Tax planning is a legal and moral way of tax saving that allows individuals and businesses to maximize their financial resources. By learning about various tax laws and utilizing the available deductions, exemptions, and tax rebates, you can reduce your tax liabilities in India.

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Disclaimer: ^Section 80C allows annual deductions of up to ₹1.5 lacs from the taxable income. Section 10(10D) provides tax-free maturity benefits for investments of up to ₹2.5 Lacs/ year, on policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.
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What is Tax Planning?

Tax planning is a method used by individuals, businesses and organizations to organize their finances and increase their tax efficiency while following the tax laws. 

You can maximise your tax efficiency by assessing your financial situation and following various strategies to reduce your tax liability as per the Income Tax Act, 1961, such as

  • Deductions as per your old and new tax regime

  • Exemptions on payable tax

  • Tax rebates

  • Tax credits

  • Tax-saving investments

You need to consider the timing of your income, the size of your purchase, the timing of purchases, and other expenses for tax planning.

The best and effective way of tax planning ensures compliance with tax laws in India while minimizing the amount you owe to the tax authorities, which will help you to retain more of your earnings.

Objectives of Tax Planning

Tax planning is an important way to wisely plan your savings, expenses, and purchases of the best investment plans. The key objectives behind following this strategy are listed below:

  • Reduce Taxable Income: Reduce your overall tax liability using deductions, exemptions, rebates, and credits.

  • Avoid Legal Issues: Ensure compliance with tax laws to prevent penalties, fines, and audits.

  • Maximize Savings: Use tax-saving strategies to increase your savings for financial goals, investments, and wealth accumulation.

  • Achieve Financial Stability: Manage taxes effectively to allocate resources towards essential expenses, savings, and emergency funds.

  • Boost Productivity: Streamline tax processes to focus on core activities and revenue-generating tasks.

  • Meet Financial Goals: Allocate funds efficiently for investing in retirement plans, child education plans, or asset purchases.

  • Manage Risk: Mitigate financial risks by diversifying investments and optimizing tax liabilities.

Therefore, it is the duty of every citizen to carry out proper tax planning. There are various benefits that you can avail with tax saving schemes based on your tax slab, social liabilities, and personal preferences.

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Types of Tax Planning Strategies in India

The different methods of planning your taxation in India are as follows:

  1. Short-Term Tax Planning:

    You plan to minimize your tax liability closer to the end of the current financial year and choose to invest in the best investment options to save tax. However, you might end up making hasty decisions while filing your ITR in the shortage of time.

  2. Long-term Tax Planning:

    As the saying goes, well begun is half done. So, when you start planning your tax saving investments at the beginning of the financial year while considering your financial goals and priorities, it is long-term tax planning. A well-chalked-out plan always helps in the long-run.

  3. Purposive Tax Planning:

    Purposive tax planning involves making financial decisions to avail of maximum tax benefits by taking right investment decisions, changing the residential status, selecting right investment plans, replacing the non-performing assets, business expansion, or creating new income sources.

  4. Permissive Tax Planning:

    Permissive tax planning means availing of different tax concessions, deductions, incentives, and other exemptions that are permissible under the law by investing in tax saving investment options.

  5. Marginal Tax Planning:

    You optimise your tax saving by analysing the effect of your different expenses and income sources on your tax liability under the marginal tax planning strategy. It is a best practice to optimize your lower tax bracket income to reduce your overall tax liability. 

  6. Structural Tax Planning:

    Structural tax planning means you restructure your business or personal finances and take the help of various tax exemptions, deductions, or incentives provided under the Income Tax Act, 1961. You can take advantage of tax benefits by creating partnerships, using trusts for reduced obligations, or establishing entities that are optimized for lower tax liability.

Importance of Tax Planning

Tax planning offers you with various benefits, some of them are mentioned below:

  • You can reduce your taxes through smart financial decisions, unlike fixed costs.

  • It can increase your cash flow and reduce the tax burden by benefiting from tax deductions, exemptions, and tax rebates.

  • Allow you to plan your income for the much needed retirement plans, education investments, or emergency funds.

  • Proactive tax planning provides you with greater financial stability and long-term savings.

  • Effective tax strategies help you to retain more money, contribute to wealth building, and secure your financial future.

  • Proper tax planning ensures compliance with the tax regulations and, thus, reduces any risk of legal issues and penalties.

Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax

Tax-Saving Deductions and Exemptions Available in India

The table highlights the key tax-saving sections available for deductions and exemptions in India.

Section Purpose Deduction/Exemption
Section 80C Investments in PPF, NSC, ELSS, etc. Up to ₹1,50,000
Section 80CCC Contribution to pension funds Up to ₹1,50,000 (combined limit with 80C)
Section 80CCD(1) Contribution to National Pension Scheme (NPS) Up to ₹1,50,000 (combined limit with 80C)
Section 80CCD(1B) Additional contribution to NPS Additional ₹50,000
Section 80D Medical insurance premium Up to ₹25,000 (self, spouse, children); ₹50,000 (old-age parents)
Section 80DD Maintenance, including medical treatment of a dependent who is a person with a disability ₹75,000 (disability); ₹1,25,000 (severe disability)
Section 80DDB Medical treatment for specified diseases ₹40,000 (under 60 years); ₹1,00,000 (60 years and above)
Section 80E Interest on education loan Entire interest amount
Section 80EE Interest on home loan for first-time buyers Up to ₹50,000
Section 80EEA Interest on home loan (Affordable housing) Up to ₹1,50,000
Section 80G Donations to specified funds and charities 50% or 100% of the donation amount
Section 80GG Rent paid (for those not receiving HRA) Up to ₹5,000 per month or 25% of total income
Section 80TTA Interest on savings accounts Up to ₹10,000
Section 80TTB Interest on deposits for senior citizens Up to ₹50,000
Section 24(b) Interest on home loan Up to ₹2,00,000
Section 10(10D) Tax exemption on maturity proceeds of life insurance policies Entire amount
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Top Tax Saving Investment Plans in India in 2024

The following table summarizes the key tax-saving options under various sections of the Income Tax Act in India.

Category Sections for Tax Benefit  Limit
Unit Linked Insurance Plan (ULIP) Section 80C and 10(10D) Up to ₹1,50,000 under Section 80C
Pension Plans Section 80C and 10(10D) Up to ₹1,50,000 under Section 80C
Child Plans Section 80C and 10(10D) Up to ₹1,50,000 under Section 80C
Guaranteed Return Plans Section 80C Up to ₹1,50,000
Public Provident Fund (PPF) Section 80C Up to ₹1,50,000
Life Insurance Plans Section 80C Up to ₹1,50,000
ELSS Scheme Section 80C Up to ₹1,50,000
Employee Provident Fund (EPF) Section 80C Up to ₹1,50,000
National Savings Certificate (NSC) Section 80C Up to ₹1,50,000
Tax Saver FDs Section 80C Up to ₹1,50,000
Sukanya Samriddhi Yojana (SSY) Section 80C Up to ₹1,50,000
Health Insurance Plans Section 80D Up to ₹25,000 (₹50,000 for senior citizens)
National Pension Scheme (NPS) Section 80CCD(1B) Up to ₹50,000

Conclusion

Tax planning in India is important to save money and stay within the government-established tax rules and regulations. By using available deductions and making smart investments, individuals and businesses can lower their taxes. Good tax planning helps you save more and achieve your financial goals, which contributes to a stronger economy.

FAQs

  • What do you mean by tax planning?

    Tax planning means organizing your financial affairs to legally minimize tax liabilities.
  • What are the principles of tax planning?

    The key principles of tax planning are as follows:
    • Compliance with legal provisions.

    • Maximization of post-tax income.

    • Selection of suitable tax-saving instruments.

    • Consideration of long-term financial goals.

    • Timing of income and expenses.

  • What is the best tax planning method?

    The best way for tax planning varies by individual but often includes a combination of utilizing tax deductions, exemptions, rebates, and investing in tax-saving instruments.
  • Is tax planning legal in India?

    Yes, tax planning is legal in India as long as it complies with the Income Tax Act and other relevant laws.
  • What is the role of tax planning in compensation benefits?

    Tax planning helps in structuring compensation packages to maximize net income by taking advantage of allowable deductions, exemptions, and benefits.
  • What is the difference between tax planning and tax management?

    Tax planning focuses on minimizing future tax liabilities through strategic financial decisions, while tax management involves ensuring compliance with tax laws and timely filing of tax returns.

Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
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