Tax Planning

What is Tax Planning?

Taxes can eat into your annual earnings. To counter this, tax planning is a legitimate way of reducing your tax liabilities in any given financial year. It helps you utilise the tax exemptions, deductions, and benefits offered by the authorities in the best possible way to minimise your liability.

The definition of tax planning is quite simple. It is the analysis of one’s financial situation from the tax efficiency point-of-view.

Objectives of Tax Planning

Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961. The primary concept of tax planning is to save money and mitigate one’s tax burden. However, this is not its sole objective.

Advantages of tax planning:

1. To minimise litigation: To litigate is to resolve tax disputes with local, federal, state, or foreign tax authorities. There is often friction between tax collectors and taxpayers as the former attempts to extract the maximum amount possible while the latter desires to keep their tax liability to a minimum. Minimising litigation saves the taxpayer from legal liabilities.

2. To reduce tax liabilities: Every taxpayer wishes to reduce their tax burden and save money for their future. You can reduce your payable tax by arranging your investments within the various benefits offered under the Income Tax Act, 1961. The Act offers many tax planning investment schemes that can significantly reduce your tax liability.

3. To ensure economic stability: Taxpayers’ money is devoted to the betterment of the country. Effective tax planning and management provide a healthy inflow of white money that results in the sound progress of the economy. This benefits both the citizens and the economy.

4. To leverage productivity: One of the core tax planning objectives is channelising funds from taxable sources to different income-generating plans. This ensures optimal utilisation of funds for productive causes.

Types of Tax Planning

Most people merely perceive tax planning as a process that helps them reduce their tax liabilities. However, it is also about investing in the right securities at the right time to achieve your financial goals.

Following are some of the various methods of tax planning:

1. Short-range tax planning Under this method, tax planning is thought of and executed at the end of the fiscal year. Investors resort to this planning in an attempt to search for ways to limit their tax liability legally when the financial year comes to an end. This method does not partake long-term commitments. However, it can still promote substantial tax savings.
   

2. Long-term tax planning This plan is chalked out at the beginning of the fiscal and the taxpayer follows this plan throughout the year. Unlike short-range tax planning, you might not be offered with immediate tax benefits but it can prove useful in the long run.
   

3. Permissive tax planning This method involves planning under various provisions of the Indian taxation laws. Tax planning in India offers several provisions such as deductions, exemptions, contributions, and incentives. For instance, Section 80C of the Income Tax Act, 1961, offers several types of deductions on various tax-saving instruments.
   

4. Purposive tax planning Purposive tax planning involves using tax-saver instruments with a specific purpose in mind. This ensures that you obtain optimal benefits from your investments. This includes accurately selecting the appropriate investments, creating an apt agenda to replace assets (if required), and diversification of business and income assets based on your residential status.

How to save taxes?

Taxpayers are provided with several options to reduce their tax liabilities. Various sections of the Indian income tax law offer tax deductions and exemptions, of which Section 80 C is the most popular tax-saving avenue. For e.g., Deposits in Public Providednt Fund , Five Year Bank Depoists, National Savings Certificate , Investment in ELSS schemes.

A practical approach to saving taxes is to create a well-rounded financial plan that aligns with fluctuations in your income. You may use any SIP Calculator for financial planning. Also, it is a good habit to make tax-saving investments at the beginning of the year rather than making hasty and often incorrect investment decisions at the last moment. To do this, it is crucial to be aware of all the exemptions and deductions available to you.

Tax saving options under Section 80C

Section 80C, one of the most prevalent sections in the Income Tax Act, 1961, provides provisions to save up to Rs46,800 (assuming the highest slab of income tax i.e. @30% plus education cess 4%) on tax liabilities each year. One of the best tax-saving avenues under Section 80C is investing in an equity-linked savings scheme, more commonly known as ELSS . Such tax planning mutual fund offer the dual benefit of potential capital appreciation and tax-saving. Apart from ELSS funds, you can choose to invest in government schemes such as National Savings Certificate (NSC), Public Provident Funds (PPF), tax-saving FDs, etc. Cumulative investments under these securities can offer deductions up to Rs1.5 lakh.

Tax saving options under Section 80D

Under this section, taxpayers are offered deductions on the premium paid towards health insurance policies. Under Section 80D, a taxpayer can claim the following amounts as deductions:

1. Avail up to Rs25,000 on the premium paid towards health insurance for self, children, or spouse

2. Avail up to Rs50,000 if your parents are also covered under your health insurance plan

3. If either of your parents belongs to the senior citizen bracket, then a maximum deduction of Rs75,000 is allowed

Tax saving options under Section 80E

Section 80E offers tax deductions on the interest paid for an education loan. These deductions can be claimed for eight years starting from the date of repayment. There is no upper limit on the deductible amount. This means that an assessee can claim the entire amount paid as interest from the taxable income.

Claiming HRA Exemption

Under HRA, taxpayers can avail exemption on the cost incurred to stay in a rented accommodation. The taxpayer is mandated to furnish the rent receipts provided by the landlord. The deduction available is the least of the following amounts:

1. Actual HRA received; or

2. 50% of basic salary+DA (dearness allowance) for taxpayers living in metro cities; & 40% of (basic salary + DA) for taxpayers residing in non-metro cities; or

3. Total rent paid less 10% of basic salary + DA

Other Exemptions and Deductions

Apart from the deductions and the exemptions mentioned above, you can save taxes in several different ways. Donations towards charities and qualified organisations are also eligible for tax exemptions.

Under the new tax regime announced with the Union Budget 2020, individuals can opt to pay taxes at reduced rates and redefined income tax slabs by forgoing the various deductions and exemptions.

Income tax planning, if performed under the framework defined by the respective authorities, is an entirely legal and a smart decision. However, you might land yourself in trouble for adopting shady techniques to save taxes. It is the duty and responsibility of every citizen to carry out prudent tax planning. Based on your tax slab, personal choices, and social liabilities, you can choose from distinct tax saver mutual funds and investment avenues offered to you. Good luck!

Here is a comparison between the deductions and exemptions available under the new and the old tax regime:

Particulars	Old Tax Regime	New tax Regime  (until 31st March 2023)	New Tax Regime    (From 1st April 2023)
Income level for rebate eligibility	₹ 5 lakhs	₹ 5 lakhs	₹ 7 lakhs
Standard Deduction	₹ 50,000	-	₹ 50,000
Effective Tax-Free Salary income	₹ 5.5 lakhs	₹ 5 lakhs	₹ 7.5 lakhs
Rebate u/s 87A	₹12,500	₹12,500	₹25,000
HRA Exemption	✓	X	X
Leave Travel Allowance (LTA)	✓	X	X
Other allowances including food allowance of Rs 50/meal subject to 2 meals a day	✓	X	X
Standard Deduction (Rs 50,000)	✓	X	✓
Entertainment Allowance and Professional Tax	✓	X	X
Perquisites for official purposes	✓	✓	✓
Interest on Home Loan u/s 24b on: Self-occupied or vacant property	✓	X	X
Interest on Home Loan u/s 24b on: Let-out property	✓	✓	✓
Deduction u/s 80C (EPF | LIC | ELSS | PPF | FD | Children's tuition fee etc)	✓	X	X
Employee's (own) contribution to NPS	✓	X	X
Employer's contribution to NPS	✓	✓	✓
Medical insurance premium - 80D	✓	X	X
Disabled Individual - 80U	✓	X	X
Interest on education loan - 80E	✓	X	X
Interest on Electric vehicle loan - 80EEB	✓	X	X
Donation to Political party/trust etc - 80G	✓	X	X
Savings Bank Interest u/s 80TTA and 80TTB	✓	X	X
Other Chapter VI-A deductions	✓	X	X
All contributions to Agniveer Corpus Fund - 80CCH	✓	Did not exist	✓
Deduction on Family Pension Income	✓	X	✓
Gifts upto Rs 50,000	✓	✓	✓
Exemption on voluntary retirement 10(10C)	✓	✓	✓
Exemption on gratuity u/s 10(10)	✓	✓	✓
Exemption on Leave encashment u/s 10(10AA)	✓	✓	✓
Daily Allowance	✓	✓	✓
Conveyance Allowance	✓	✓	✓
Transport Allowance for a specially-abled person	✓	✓	✓