Tax planning: Types & Objectives in mutual funds

Concept Of Tax planning(TP)

Tax planning is a statutory and legal means of decreasing one’s tax liabilities in a year. It will assist one to use the tax exemptions, deductions, and advantages in the great likely way for reducing the tax burden. All the tax saving practice comes under section 80C.

Tax saving practices involve tax avoidance, tax evasion and tax planning. Out of those tax planning is the only legal manner of decreasing tax liabilities. The government gives several opportunities to save on taxes. The aim of decreasing the tax load on a taxpayer by legal income tax planning designs.

It is the interpretation and analysis of one’s financial situation from a tax capability point of view. So as to plan one’s finances in the most optimized way. Also, enables a taxpayer to make the best use of the various tax exemptions, deductions and privileges to decrease their tax liability over a financial year.

They play is a vital part of a financial plan. Reduction of tax liability and maximizing the capacity to provide retirement plans are essential for profit.

Before learning more about TP, one should know these important terms

Basic Terms in Tax planning

• Basic exemption limit

How does one find out if one’s income is taxable or not, though? By knowing about the necessary exemption limit. Exemption limit is the least income limit beyond which one’s income converts taxable. In simple words, if one’s income is under the basic exemption limit, one does pay any taxes.

For example, if the basic exemption limit is INR 3,50,000 for the current fiscal year. One’s annual income is below this value.No need to pay any taxes.

• Slab rates

Slab rates are diverse levels of income according to which one’s taxability is defined. According to the Income Tax Act, 1961, each taxpayer is split into various income groups to plan the rates at which their income will be taxed. These groups are called tax slabs.

Note: Whenever one’s income rises or fall, it will too begin a change in one’s tax slab and thereby in your tax liability. To lawfully decrease tax liability, one can invest in tax-saving instruments. Avail of tax advantages like deductions and exemptions available on them.

• Deductions

A deduction is a set of tax benefit which avails to decrease taxable income. This deduction could be an income or an expense that one acquires.

Note: The deduction is subtracted from one’s gross income, to estimate their taxable income and thereby their taxability.

• Tax exemptions

Tax exemptions are monetary omissions that can decrease one’s taxability. These exemptions both give tax relief, decrease tax rates or guarantee that tax is appropriate only on specific portions of their income.

• Gross income and taxable income

One’s gross income is the sum income one have received in a financial year. It is the amount total of all the income from the following income sources:

1. Business
2. House Property
3. Profession
4. Capital Gains
5. Salary

From this gross income, one’s deductions and exemptions deduct to determine their taxable income. On this taxable income, they find their tax liability as per various slab rates.

Tax Planning in mutual funds

In mutual fund investment tax saving has a different way. Tax-planning funds provide to the investors are essential for reducing the tax burden on the returns from investments. Mutual funds do provide tax benefits along with high returns.
Tax on mutual funds reduces the burden of tax through – equity-linked tax saving funds or ELSS. They are funds that have a lock-in period of 3 years with close-ended schemes, also are the market capitalization agnostic.

Read more about : Best ELSS funds

It indicates planning closer to the end of the fiscal year. Plus picking the greatest investment choices to save tax. Still, one might end up making quick decisions to file their ITR in the short of time.

• Permissive Income Tax Planning

It means making tax saving investments to avail various tax concessions. The various deductions and incentives, and extra exemptions that are allowable under the law.

• Purposive IncomeTax Planning

This means clearly planning the taxes to get the highest profits by choosing the correct investment decisions. Changing living status through :

1. The right choice of investment
2. Substituting the assets
3. Business expansion programme

Tips assist in saving tax on income

One can hold all the medical receipts of their medical expenses. To use them for saving tax year end. An amount up to Rs 15000 is non-taxable on medical expenses for them and their dependent family members.

• House rent allowance

Can claim House Rent Allowance to save tax on one’s house rent. Though, this is relevant only when they are staying in rented accommodation.

• Equity mutual funds

Investment in equity mutual funds is a vast approach to make profits 100% non-taxable. Still, it is prudent not to trade one equity shares before a period of 1 year as anything less than 12 months may acquire tax on profits.

Must Read: Best equity mutual funds 

• Make donation

It is a great way to save tax on income. Section 80G of the Income Tax Act allows a person to claim deductions up to a particularised limit. For donations made to charitable organizations or NGOs. This choice will save taxes as well as bring some way.

• Buying of health policies

Premium paid on health insurance policies is recognised as a deduction from total income. In reference to the to Section 80D of the Income Tax Act. Deduction up to Rs 15,000 is possible for insurance of self, spouse and dependent children. This is 1 of the greatest options and can be an element of tax planning.

Tax Planning in India

Indian law gives a diversity of tax saving alternatives for the taxpayers. By providing a for a high range of choices for exemptions and deductions. Through which one can restrict them all over tax output.

• The deductions are free from Sections 80C through to 80U and can be used by suitable taxpayers.
• Every deduction result upon the quantum of tax liabilities.
• There several additional sections under the Income Tax Act of 1961 like exemptions and tax credits that can lessen one’s tax liabilities.

• Office expenses,
• Health insurance of employees,
• Charitable contributions
• Taking deductions on business transport
• Childcare
• Retirement planning

By the many tax deductions and exemptions given under the Income Tax Act, a company can essentially decrease its tax burden in a lawful system.

Note: Once again, tax planning should not be mixed with tax avoidance as all the planning is done within the structure of the law.

Rising profits for a company appears in higher tax liabilities. As such, it enhances important for them to dedicate sufficient time on tax planning to decrease the liabilities. With usual tax planning, the direct tax and indirect tax load are overcome at times of inflation. It additionally helps in precise planning of investments, capital budget and selling and marketing costs, among others. A good tax planning results can be seen :

• Revealing the right information to appropriate IT departments.
• Legal tax planning should be made which is supporting the purview of the law.
• Never avoiding tax laws as well as court judgements concerning the same.
• Business objectives should be the reason for planning in mind. It must be adaptable enough to incorporate feasible changes in the future.

Points result in good tax planning

• Staying fully notified of suitable tax laws and court judgements.
• Providing accurate information to appropriate IT specialists.
• Tax planning must be done entirely supporting the view of the law.
• Income Tax clauses appear very complex that the normal man is averse of dealing with taxes.
• The business objectives are considered in planning. Also, compliance for the incorporation of future modifications.

This is the order of a tax payer’s business or financial dealings, in such a form that total tax benefit can be availed by lawful means so that the expense of the tax is minimum.

Mistakes people do while tax planning

• Not Following the Elementary Forms

Taxpayers are not aware of or avoid using the essential forms and documents which are required in tax planning. One should understand the necessary forms and tax documents. So that in future it won’t create conflicts

• Forgetting or Neglecting  an IP PIN

If one has an IRS IP PIN – allotted to identity fraud victims and open in other specific cases. One needs to insert PIN number on their form to avoid delays. The delays to avoid with paper returns or outright rejection for e-filing.
Note: IP PIN is not similar to an e-filing PIN. An IP PIN appeals despite how he/she file their form.

• Transferring up Deductions or Credits

So many people just think that they don’t fit in for tax credits or don’t have sufficient deductions to detail.
One may be giving up vital savings- Specifically with tax credits that deduct Straight away from one’s tax bill. Recognize that few deductions are above-the-line. Means that one can take them in case one not count additional deductions.

• Control of compounding through tax saving mutual funds

Through tax saving mutual funds several people don’t recognise the potential of compounding despite every financing determinants.

• Investing in insurance products for saving tax

At the end of the year, everyone mostly receives a phone call from insurance companies that aks to but an insurance policy that saves tax. That’s no great investment to do.

Frequently Asked question

1. What is the purpose or need for tax planning?
Ans. Tax Planning is an active element of financial planning and the purpose is to assure tax effectiveness.

2. Why is it necessary to plan for taxes?

Ans. A proper tax planning can decrease tax liabilities. Plus save for the different purposes that one have set at various stages of life.

3. What do you mean by tax management?
Ans. Tax Management is needed and involves filing the ITR in time, practising corrective procedures, paying advance tax, tax auditing etc.

Conclusion