There is a lot of talk about tax planning in India. But what exactly is it? Tax planning is a process by which you can make your money work harder. If you have been looking to save on taxes, this guide is a must-read.
Tax planning is how a person or business entity can reduce the tax they have to pay on their income or capital gains. It’s important to note that tax planning doesn’t always mean reducing your tax liability; it can also mean increasing it if it works best for your situation.
We’ll take you through some of the most common forms of tax planning, how they work, some of the best tax saving plans, and how you can use them yourself.
Tax planning minimizes your tax liabilities by using the various tax exemptions, deductions, and benefits. Tax planning allows you to make the best use of the numerous tax exemptions, deductions, and benefits available to you, which will help you reduce your annual tax liability.
Tax planning involves analyzing your financial position from a tax efficiency point of view to plan your finances in an optimized manner. This will help you minimize your tax liability and increase your overall net worth.
Tax planning is a legal way of reducing income tax liabilities, but it needs to be done with caution so that taxpayers do not indulge in tax evasion.
Personal finance involves tax planning, making it a crucial factor. It helps you reduce your tax burden, plan your income and expenses, and save for the future.
Tax planning can be as simple as rearranging your investments to take advantage of tax benefits offered by the Income Tax Act, 1961. Or it can be as complex as deciding when to sell one asset and purchase another to minimize taxes on capital gains.
Tax planning involves
- Claiming excess tax paid or deducted
- You are reducing tax liabilities
- Planning events (such as buying a home)
- Tax calculation
- Earning tax-free returns
When it comes to financial planning, most people focus on saving taxes. But the truth is that tax planning is only one part of your overall financial plan. If you don’t consider everything else, then what you’re doing isn’t tax planning—it’s just tax saving.
So what exactly is the difference?
Tax saving is when you do something that decreases your tax liability, like buying an insurance product or investing in a mutual fund that pays dividends taxed at a lower rate than ordinary income.
On the other hand, tax planning means making decisions based on your life—like when to retire and how much to save for retirement—to optimize your overall financial situation.
Procrastination is one of the biggest obstacles to effective tax planning because it leads people to make decisions based on emotion rather than logic and reason. Your haste often gets you to forget or ignore other facets of financial planning, such as your age, income level, ability to take risks and prioritizing financial goals.
For many, tax planning and tax calculation start and ends with Section 80C of the Income-tax Act 1961. But investing only in these investment instruments would not lead to an optimal reduction of your tax liability. Therefore, look beyond Section 80C and avail of most tax-saving investment opportunities possible.
It is essential to understand that the government offers various investment vehicles under Section 80C that can be used to save taxes by investing in them. These include:
1) Life insurance premium—Life insurance premium paid on any life insurance policy qualifies for deduction under this section. The amount of deduction is allowed as a sum equal to 10% of the annual premium paid or ₹ 15,000 (whichever is lower).
2) Education fees—Education fees paid by you or someone else on your behalf towards tuition fees, hostel accommodation fees, library charges, etc., qualify for deduction under this section. But these expenses are subject to a limit of ₹ 1 lakh per financial year (which means an annual income limit of ₹ two lakhs).
3) Medical expense—Medical expenses paid by you or someone else on your behalf towards medical treatment qualify for deduction under this section.
For more tax calculation and planning options, you can refer to the table below
|Section||Tax saving plans|
|80C*||Tax saving plans eligible for deduction under section 80C – ELSS.Public Provident Fund.Employee Provident Fund.National Saving Certificate.Senior Citizen Savings Scheme.5-year tax-saving bank fixed deposits.5-year Post Office Time Deposit.Life insurance plan premiums, Housing loan principal repayment, etc.|
|80CCC*||Contribution made towards Pension Fund of Life Insurance Corporation.|
|80CCD*||The contribution to the National Pension Scheme (NPS) has been notified by the Central Government. A donation to NPS that exceeds the Rs 1.5 lakh limit under section 80 CCD is eligible for an additional deduction of up to Rs 50,000. (1B).|
|80CCG||Contributions made for Rajiv Gandhi Equity Savings Scheme (RGESS)|
|80D||Medical insurance premiums paid in the financial year.|
|80DD||Maintenance of a handicapped dependent who is a disabled individual, including medical treatment|
|80DDB||Expenses incurred in connection with medical treatment|
|80E||Interest on a loan taken out to further one’s education|
|80G||Donations to charity organisations and funds|
|80GG||Rent is paid on a property that is used for residential purposes.|
|80GGA||Donations for scientific research or rural development, for example.|
|80GGC||Any contributions to political parties or electoral trusts|
|80TTA||Interest on savings bank deposits can be claimed as tax-deductible.|
|80U||Contribution made towards insurance of a person who has a specific disability.|
Tax planning is not about saving taxes. It is about making the most of your tax saving plans and managing your investments in a way that will increase their value and help you reach your goals.
Tax-saving investment options are available under Section 80C, but doing your tax planning exercise at the last minute can lead to only tax savings, not tax planning.
A well-planned portfolio should be based on an asset allocation model that considers your age, ability to take risks, and investment horizon.