A tax is a mandatory charge levied by the government on an individual’s or a business’s hard-earned income during any financial year. While paying taxes is certain and inescapable there are various ways to diminish this burden and one such measure is tax planning.
Tax planning is a process of analyzing one’s financial situation during the year and coming up with various exemptions and deductions that reduces tax liability in a legitimate manner. Tax planning is classified into the following types
1. Purposive tax planning – Purposive tax planning means applying the right tax provisions with the purpose of getting the maximum benefit by making suitable considerations for the replacement of assets, diversifying business activities and income, varying the residential status, and correct selection of investment, etc.
2. Permissive tax planning: Permissive tax planning refers to the plans which are permissible under the Income-tax Act,1961. For example, planning to claim various deductions under Section 80, incentives for getting the benefit of different tax concessions, etc.
3. Short-term tax planning: short term tax planning for limited or specific objectives at the end of the year to reduce taxable income in a legitimate manner.
4. Long-term tax planning: Long-term planning is undertaken at the beginning of the year for a long-term objective to pay off for a longer period of time, for example investing in Sukanya Samriddhi Yojana for a longer period of time.
OBJECTIVE OF TAX PLANNING
The basic objective of tax planning is to reduce the burden of tax liability and induce the insurance of taxation and budgetary efficiency. Good tax planning helps an individual to have the following advantages
- Minimal Litigation: An effective Tax planning helps to ensure that all the taxable compliance is made within the given time limit to avoid risks of penalty or notices and to minimize any possibility of litigation between taxpayer and income tax department.
- Productivity: An effective tax planning ensures that incomes from various taxable sources are diverted towards the most beneficial tax-saving option schemes.
- Reduction of Tax Liability: As a taxpayer, you can save the maximum amount of tax liability and thus reduce the tax burden as permissible by the required provisions of laws.
- Healthy Economic Growth: The growth in an economy depends upon the flow of money in the market. Tax planning estimates the growth of white money in free flow to achieve overall economic development in the country.
PROCESS OF TAX PLANNING IN INDIA
You can plan your tax estimates by following the following easy steps
1. Calculate your estimated net total income earned during the current financial year.
2. Evaluate the total taxable aspects of your income. The tax liability varies on the nature of a person, their residential status, total income earned, age, etc.
3. Claim permissible exemptions under section 10 of the Income-tax act,1961 to reduce your total taxable burden. Various exemptions an individual can claim are as follows
(i) House Rent Allowance (HRA)
(ii) Leave Travel Allowance (LTA)
(iii) Employee Contribution to Provident Fund (EPF)
(iv) Conveyance, etc
4. Invest in various tax-saving instruments to claim deductions available to eligible taxpayers in Sections 80C to 80U of the Income Tax Act, 1961. Investment options include Provident Public Fund (PPF), Equity Linked Saving Schemes (ELSS) in mutual funds, National Saving Certificates (NSC) or 5-year bank deposits, life insurance, health insurance premium, home loan payments, etc.
5. Make Contributions made to certain relief funds and charitable institutions as prescribed funds qualify as a deduction under Section 80G of the Income Tax Act.
To make your planning effective:
- Claim the tax benefits which you have invested in eligible instruments
- Giving correct information to relevant IT authorities
- Keep updated with applicable tax laws and court judgments on the same
- Tax planning should be done completely under the purview of the law
- Planning should take into consideration future happenings which you are aware of
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Author- Adv.Shivam Kumar
Legel and content Executive, Taxblock India Pvt. Ltd
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