Tax Planning in India – With Types & Objectives

Tax Planning in India
  • Introduction
  • What is Tax Planning?
  • Types of Tax Planning
  • Objectives of Tax Planning
  • Benefits of Tax Planning.
  • Tax Planning Via Tax Saving Investment Tools
  • Tax Planning: Common Mistakes to Avoid
  • Conclusion

Rohit was an investment banker earning more than Rs.10 lakhs. His income fell into the bracket of income tax liability applicable at 15% for individuals (as per the new regime income tax slab rate FY 2020-21). His intent was to save money, but at the same time, Rohit wanted to pay tax as a responsible individual. Rohit being into the finance segment, understood the intricacies of tax. He knew that it would require tax planning to utilize in the best manner available deductions and exclusions.

To work out things better, Rohit connected with his financial advisor to know about the tax-saving investment tools. If you are a novice and wish to know in detail what tax planning is, read further.

What is Tax Planning?

Tax planning is an activity to maximize available deductions, exclusions, allowances, and rebates to use tax liability by an individual or a business owner. The method is entirely legal. The government introduced ways to reduce tax liability through tax saving investment and tax savings insurance policies. Proper tax planning helps individuals control their finances and achieve financial goals with great ease.

Types of Tax Planning.

In common, there are three types of tax planning in India. These include:

  • Permissive Tax Planning: Permissive tax planning is the process to use permissible plans under various provisions of the law. For example, planning of taking deductions under Section 80C, Section 80D, benefits from different tax concessions falls under permissive tax planning.
  • Purposive Tax Planning: When the taxpaying individual wishes to reduce tax liability with a purpose in mind, that is called purposive tax planning. The purpose is to get a maximum tax benefit by making appropriate investments, diversifying business activities and income.
  • Long Range and Short Range Tax Planning: Short-range or long-range tax planning is when a taxpayer prepares investments and saves based on the exemptions, benefits, allowances, and deductions outlined in the tax rules, with a short- or long-term aim in mind. Most investment products come with a lock-in period during which no redemption is allowed. For example, Equity Linked Savings Scheme comes with a minimum lock-in period of 3 years, becoming a short-range tax planning. On the contrary, the PPF has a lock-in period of 15 years which makes it a long-range tax planning source.

After reading the type of tax planning, you must be thinking about why you should put your brains in tax planning rather than picking up a random tax saving investment product. Therefore, you must understand the objectives of tax planning in detail.

What are the Objectives of Tax Planning?

Tax planning is the only way to ensure that you save your money wisely instead of giving it all in the name of tax. Majorly the tax planning activities conform to the legal obligations and pay tax according to the rules. These are the critical objectives of tax planning:

  • Reducing Tax Burden

The most obvious goal of tax planning is to assist an individual or corporation lower their tax liability by utilizing available tax deductions and benefits.

  • Invest in Products for Higher Returns:

When you plan for tax savings, you can do it by buying tax saving life insurance products. These products like ULIP and Savings plan give you life protection and option of investments yielding high returns. 

  • Boost Economic Growth:

The circulation of white money in the market benefits the country’s economy and its residents. Citizens prosper economically due to tax planning, and white money circulates in the market.

  • Building a Stronger Investment Portfolio

Investing in various designated instruments and asset classes that offer tax exemptions under the Income Tax Act 1961 is an essential aspect of tax planning for individuals and organizations. They can use tax planning to find new ways to invest their money and earn a good return.

Benefits of Tax Planning.

Tax planning plays a vital role in building tax-saving strategies for individuals and businesses. The goal is to grow and make strategies that help them save money which can be invested further to generate returns. You can save a portion of your hard-earned money via tax planning. These are the benefits of tax planning:

  • Tax Savings as per the Income Tax Act

One of the main reasons tax planning with short/long-term goals is recommended is that it allows you to take advantage of the numerous deductions, allowances, refunds, and other benefits available under the Income Tax Act’s many sections.

  • Ensuring Cash Flow in Economy

Tax planning can assist you in diversifying your investments and saving in a way that is sustainable and ensures good cash flow throughout the year. This means that you can invest while covering other substantial expenses without breaking the savings.

  • Save for the Worse: 

You don’t know which turn life will take next. It leaves you to think of a plan for the future because it is uncertain. And you can plan for the future only when you work out the possibilities of saving finances. Create a cushion to lead a stress-free life when you grow old. Money saved can be used to attain future dreams that keep you and your family happy.

You will be able to work out tax planning only when you know the popular tax-saving strategies that can help. Obviously, you cannot get a tasty homemade cake unless you know how to bake it! Here you must think about ordering a homemade cake from somewhere else , but that will never be the case with tax planning.

No one else will save for you.

No one else will tell you what to do.

No one else will understand your tax-saving requirements.

Let us further see ways of tax planning via tax saving investment tools that can save considerable tax liability for you.

Tax Planning Via Tax Saving Investment Tools.

Tax planning via tax saving investment tools is possible if you comply with Income Tax Act, 1961. It allows for tax deductions under different sections that include Section 80C, Section 80D, and others.

Let us look at each one by one:

Under Section 80C:

Section 80C of the Income Tax Act, 1961 allows a tax deduction of up to 1.5 lakhs. You can choose any of the products for your tax saving investment plan.

  • Public Provident Fund
  • National Pension Scheme
  • National Savings Certificate
  • Life Insurance Policy
  • ULIP 
  • Equity Linked Saving Scheme (ELSS)

An additional Rs.50,000 over Rs.1.5 lakhs is allowed for deductions under National Pension Scheme Tier 1 investments.

Section 80D

Your premium contribution towards a health insurance policy is covered under Section 80D of the Income Tax Act. The deductions under the section are allowed as under

DescriptionMedical Insurance Premium Paid for Self, Spouse, and Dependent ChildrenMedical Insurance Premium paid for parents Total Deductions under Section 80D
No one is of 60 yearsRs.25,000Rs.25,000Rs.50,000
Individuals and families are less than 60 but parents are above 60.Rs.25,000Rs.30,000Rs.55,000
Both individual and parents are above 60 yearsRs.30,000Rs.30,000Rs.60,000

Section 24:

Individual taxpayers can claim tax deductions upto Rs.2 lakhs annually against the home loan interest payments. This will be in addition to the reduction in a tax liability of Rs.1.5 lakhs annually extended to make the payment of the home loan principal amount.

Section 10(10D) 

The maturity proceeds of the tax-saving life insurance plans are eligible for exemption under Section 10(10D) of the Income Tax Act, 1961. 

Now that you know the sections under which you can plan for the tax, you must avoid making common mistakes.

Tax Planning: Common Mistakes to Avoid.

These are the common mistakes you must avoid when thinking of tax planning.

  • Do not leave it at the last minute: Last-minute hassles leave you in the middle of the crisis. You may not be left with sufficient time to plan ways to reduce tax liabilities. Last-minute jobs can take away the opportunities available for investment. This is why it is better to avail of the tax planning options from the beginning of the financial year.
  • Do not ignore the power of compounding: If you are doing tax planning via tax saving investment tools, you should start early. When you start early, you are more likely to create wealth for yourself through compounding.
  • Investing in Insurance Products: tax planning through tax saving insurance products is the best deal. It is you are putting your money to earn dual benefits of life cover as well as investment. The right insurance product helps you maximize the use by investing the money correctly.
  • Calculate the tax liabilities correctly: If you fail to calculate the tax liabilities for yourself, you will make a mistake. This could happen if you leave tax planning for the last minute and miss out on computing all the sources of income.

Conclusion

Tax planning is not a one-time activity. As soon as you see a growth in your income level or the expenditure, you must consider the current tax liabilities. But remember to avoid these mistakes when doing tax planning. If you are a novice and do not understand the complexities of Income Tax, you should contact a tax planner for yourself.

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