Tax Planning may be described as legal way of reducing of tax liability in a year by investing in different schemes as prescribed by income tax Act. It may also include entering or exiting investment schemes so as to save maximum tax possible within the legal framework.
Need For Tax Planning
Tax payments are compulsory for all individuals who fall under the IT bracket. Now a days Tax planning is Must to reduce tax liability by investing in different investment schemes as prescribed by income tax Act,. With tax planning, one will be able to make his/her tax payments such that he or she will receive considerable returns over a specific period of time involving minimum risk. Also, effective tax planning will help in reducing a person’s tax liability.
Advantages of Tax Planning
1. To claim excess tax paid or deducted: when we don’t do tax planning results in excess tax payment & sometimes excess is deducted by employer that could have been saved by tax planning.
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 plan events: It helps us to decide when to realise capital gain and when to withdraw money from different schemes.
4. To earn tax free returns: when we invest in schemes specified in income tax act we get risk free return or fixed rate of return which are tax free subject to conditions specified in relevant section.
Following is given inclusive list of tax saving sections
80C allows deduction for investment made in PPF , EPF, LIC premium , Equity linked saving scheme, principal amount payment towards home loan, stamp duty and registration charges for purchase of property, Sukanya smriddhi yojana (SSY) , National Savings Certificate (NSC) , Senior citizen savings scheme (SCSS), ULIP, tax saving FD for 5 years, Infrastructure bonds.
80CCC allows deduction for payment towards annuity pension plans Pension received from the annuity or amount received upon surrender of the annuity, including interest or bonus accrued on the annuity, is taxable in the year of receipt
Employee’s contribution under section 80CCD(1) Maximum deduction allowed is least of the following
- 10% of salary (in case taxpayer is employee)
- 20% of gross total income (in case of self employed)
Employers contribution under section 80CCD(2) is allowed for deduction upto 10% of basic salary plus dearness allowance under this section. Benefit in this section is allowed only to salaried individuals and not self employed.
The total deduction under section 80C,80CCC,80CCD(1) & 80CCD(2) shall be subject to maximum Rs 150000.
Additional deduction under section 80CCD(1b) of Rs 50,000 is allowed for amount deposited to NPS account. Contributions to Atal Pension Yojana is also eligible for deduction. This deduction shall be in addition to 150000.
Section 80GG of Income Tax Act, 1961
Deduction shall be allowed as per provisions given below:
a. Section 80GG deduction is available for rent paid when HRA is not received. The taxpayer, spouse or minor child should not own residential accommodation at the place of employment
b. The taxpayer should not have self-occupied residential property in any other place
c. The taxpayer must be living on rent and paying rent
d. The deduction is available to all individuals
Least of following will be allowed
-
- Rent paid minus 10% of adjusted total income
- Rs 5,000/- per month
- 25% of adjusted total income
Section 80D of Income Tax Act, 1961
You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D on insurance for self, spouse and dependent children. An additional deduction for insurance of parents is available up to Rs 25,000, if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is Rs 50,000, which has been increased in Budget 2018 from Rs 30,000.
In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1 lakh.
Below tax planning have been explained with an example
| Salary Components | Salary per year |
| Basic | 629796 |
| HRA | 338892 |
| Special allowances | 775524 |
| Car allowances | 122748 |
| Medical allowances | 6000 |
| LTA | 60000 |
| Total | 1932960 |
Tax Liability without planning
| Total income(a) | 1932960 |
| Less: Standard deduction(b) | 50000 |
| Taxable income(a-b) | 1882960 |
| First 250000 | nil |
| Next 250000*5% | 12500 |
| Next 500000*20% | 100000 |
| Balance @ 30% i.e. 882960*30% | 264888 |
| Total tax | 377388 |
| Surcharge@4% | 15096 |
| Gross total liability | 392484 |
Tax Liability with planning
| (a) Total income | 1932960 |
| (b) Less: Standard deduction | 50000 |
| (c) Gross Taxable income(a-b) | 1882960 |
| (d) Deduction under section 80C | 150000 |
| (e) Deduction under section 80CCD(1B) | 50000 |
| (f) Deduction under section 80D | 50000 |
| (g)Net taxable Income | 1632960 |
| First 250000 | nil |
| Next 250000*5% | 12500 |
| Next 500000*20% | 100000 |
| Balance @ 30% i.e. 632960*30% | 189888 |
| Total tax | 302388 |
| Surcharge@4% | 12096 |
| Gross total liability | 314484 |
As you can see tax liability of Rs 392484 without tax planning & Rs 314484 with tax planning.
Conclusion-
Tax got reduced materially i.e. Rs. 78000(392484-314484).
Author Bio
Hi,
My age is 32 year and if i purchase health insurance or term life insurance. then that insurance amount will be deductible under 80D or not?
I purchased 1000 shares of a company on different dates at different prices. While selling,is it a must/legal to follow the prctice of FIFO or I can sell any lot I desire. It is important to plan Long/Short term Capital Gains.Please reply.
Hi Davinder. You can sell any lot you desire. Yes it is important to plan STCG/LTCG.
How to calculate Tax on dividend paid by mutual funds
Dividends from mutual funds are taxed at normal rates w.e.f. April,2020. The amount of tax will depend upon the tax slab rate you fall in. TDS on dividends above Rs.5000 is however deducted@10%.
thank you so much
Your welcome.
In the tax planing forget to give deduction on HRA, is rented, loaned one,if any receiving rent from employer or self occupied house etc.
Hi Vipan. This is just an example. HRA is not available to everyone so i didn’t mention. Lets assume that the individual is living in his own house. Thanks