Tax Planning - Importance and Benefits of Tax Planning

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Tax planning is the logical analysis of a financial position from a tax perspective. Tax Planning allows a taxpayer to make the best use of the different tax exemptions, deductions and benefits to minimize his tax liability each financial year.  The use of tax payers is to guarantee tax effective.

Investments are the best way to reduce tax liability substantially and tax payers consider it to be a good way to save tax.  There are many options available to save more and reduce taxes. If an individual has done proper financial & tax planning then deductions would be subtracted from the gross total income and income tax would be levied on the balance income as per the income tax slabs.

What is Tax Planning?

Individuals, businesses and organizations do tax planning to assess their financial profile and save on the taxes paid on their annual income and profits earned.

‘Govt. data as per the assessment year 2014-2015 reveals that only 1.5 per cent of Indians actually pays their taxes’.Therefore, proper tax planning is required for both first-timers and veteran tax-payers. So that an appropriate tax amount is paid to the government to promote economic activity and personal savings are also managed.

As per the Income Tax Act, 1961 a number of legal tax saving options are available under section 80C&80D and beyond 80Csuch as 80 EE, including other rebates and reliefs.

You can actually start the fiscal year on a secure footing if you timely review your financial portfolio and then make tax-related investments.

Types of Tax Planning in India

The different methods of tax planning in India are described below -

  1. Short-term Income Tax Planning- It implies planning closer to the end of the financial year and choosing the best investment options to save tax. However, you might end up making hasty decisions to file your ITR in the nick of time.
  2. Long-term Income 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 it is long-term tax planning. And a well chalked out plan always helps in the long-run.
  3. Purposive IncomeTax Planning- Purposive tax planning means specifically planning the taxes to avail maximum benefits by taking right investment decisions, changing the residential status, through correct selection of investment, replacing the assets, business expansion programme, income etc.
  4. Permissive Income Tax Planning-It means making tax saving investments to avail different tax concessions, different deductions and incentives, and other exemptions that are permissible under the law.

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.

A good tax planning is done by using the right mix of investments in order to minimize the tax liabilities.

Here are some tips to help you save tax on your income:

1.      Save via interest payment on loan

If you have a loan such as education loan, home loan, car or personal loan then tax saving becomes easy. The government allows tax benefits for individuals who are repaying loans. Some investments that you many consider under Section 80C are: Life insurance premium paid towards self, spouse or child, contribution towards statutory provident fund or superannuation fund, contribution towards public provident fund scheme, subscription to units of mutual fund equity linked saving scheme notified by the central government, etc. It can be a better tax saving option if tax planning by payment of loan is done wisely.

 2.      Buy a Health Insurance Policy

Premium paid on health insurance policies is allowed as deduction from your total income, according to Section 80D of the Income Tax Act. Deduction up to Rs 15,000 is available for insurance of self, spouse and dependent children. This is one of the best options and can be part of tax planning.

 3.      Make a donation

Making a donation is a good way to save tax on your income. Section 80G of the Income Tax Act allows an individual to claim deductions up to a specified limit for contributions made to charitable organizations or NGOs. This option will save taxes as well as bring some virtue.

 4.      Equity Mutual Funds

Investment in equity mutual funds is a great way to make your profits 100% non-taxable. However, it is advisable not to sell your equity shares before a period of one year as anything less than 12 months may incur tax on profits.

 5.      Amount received as gifts

Any gifts received on your marriage in the form of cash or cheque are totally tax free. You can receive cash gifts from your relatives or friends for which you don’t have to pay any tax.

 6.      House Rent Allowance

You can claim House Rent Allowance (HRA) to save tax on your house rent. However, this is applicable only when you are staying in a rented accommodation.

 7.      Medical Bills

You can keep all the medical receipts of your medical expenses to use them for tax saving at the end of the year. An amount up to Rs 15000 is non-taxable on medical expenses for yourself and your dependent family members.

 8.      Telephone/Internet Expenses

You can check with your employer if they have a tax saving policy on telephone or internet expenses. You can either get telephone/internet expenses reimbursed or claim tax benefits for the same. Income tax planning for small amounts has impact on total taxes. So don’t ignore it.

 9.      Daily Travel Allowance

You can avail tax benefits up to Rs 1600 per month from your company for conveyance. This will allow you to save tax on Rs 19,200 annually on conveyance allowance. Also, you do not have to submit any invoices or proof to avail the same.

 10.    Meal Coupons

Meal vouchers or any gift vouchers including Sodexo are not taxable up to Rs 2600 per month. You can ask your employer to either issue you meal coupons every month to claim tax benefits or reimburse the same.

 11.    Leave Travel Allowance

Leave Travel Allowance (LTA) can be utilized by you for domestic vacations. You will not be taxed on travel expenses for yourself and your dependents.

Tax Planning FAQs-

1. What do you mean by tax planning?

It means planning the taxes to avail all the rebates, deductions and exemptions under the different sections of the Income Tax Act, 1961.

2. What is the goal of tax planning?

Tax planning is an efficient part of financial planning and the goal is to ensure tax efficiency.

3. What is the primary purpose of effective tax planning?

The primary purpose of tax planning is to reduce the tax implications by reducing the amount of taxable income.

4. Why is it important to plan for taxes?

With proper tax planning, you can reduce your tax liabilities and also save for the various goals that you have set at different stages of your life.

5. What are tax planning and tax avoidance?

Tax planning is done to avail maximum benefits of tax deductions, exemptions, rebates, allowances and concessions that are permissible under the Income Tax Act, 1961. The idea is to reduce the tax burden of the assets without breaking the law.

Tax avoidance means arranging your financial activities violating the legal provisions through unacceptable means

6. What is the difference between tax avoidance and tax evasion?

The difference between the two is elucidated in the table below-

Tax Avoidance

Tax Evasion

1.       Tax payment is done by defeating the intention of the law-maker but by adhering the provisions of the law

Tax payment is evaded through unlawful means

2.       Not a punishable offence

Punishable offence

3.       Looks similar to tax planning and is done before the onset of tax liability

Fraudulent act and is done after the onset of tax liability

 7. Is Tax avoidance legal?

It is considered as legal, however, it is not recommended to use it for your own advantage.

8.  What is the tax management?

Tax Management is required includes filing the ITR in time, taking corrective actions, paying advance tax, tax auditing etc.

9. What is Corporate Tax Planning?

Corporate Tax Planning involves strategically structuring of a company to reduce tax liabilities within the framework of the law. Commonly, it includes corporate health insurance, deductions on business transport and office expenditure, charitable contributions, retirement planning etc.

Broadly, corporate tax planning implies an effective planning of the -

  • Cost of marketing & sales
  • Company expenses
  • Capital budget

10.  How can I reduce my taxable income?

Elucidated below are some of the recommended ways of saving income tax-

  • Save Tax u/s 80C, Sec. 80CCC, & Sec. 80CCD and the limit under these sections Rs. 1, 50,000
  • U/s 80D for health insurance premium paid for self and family
  • U/s 80DD for treatment of dependents who are handicapped
  • U/s 80DDB for medical treatment of certain specified diseases
  • Tax exemption for interest paid on home loan u/s 80EE
  • U/s 80E tax benefit against education loan
  • U/S 80CCG you can get tax exemption for investments made in company shares and mutual funds provided yearly salary is more than 12 lakhs.
  • Tax benefits for donations under section 80G

11. What happens if I don’t file my taxes?

There are various penalties for not filing your taxes, which are decided by the income tax officer if the need be.

  • 50% of penalty is imposed for under-reporting your income.
  • For undisclosed income, 10% penalty is levied.
  • If you do not present your TDS/TCS statement or furnish incorrect statements, a penalty of Rs. 10,000 to Rs. 1, 00,000 can be charged.

And there are various other penalties in case of non-compliance with the book of accounts.

12. Can you go to jail for not paying taxes?

Yes, it is a punishable offence and can put you behind the bars.

13. Which is illegal tax evasion or tax avoidance?

Tax evasion is illegal as it is done by using fraudulent methods to save tax.