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 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.
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 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:
- House Property
- Capital Gains
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
Types of Tax Planning
There are different kinds of tax planning some of them are listed below :
Long-term Income Tax Planning
When one begins planning their tax-saving investments at the start of the fiscal year it is long-term tax planning. And a great defined returning out plan regularly benefits in the long-run.
Short-term Income Tax Planning
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 :
- The right choice of investment
- Substituting the assets
- Business expansion programme
Objectives of tax planning
There is always a conflict between the collector and the payer of tax. In such a state, it is essential that the compliance about tax payment is followed and used correctly so that friction is least.
Strong Development of Economy
The extension in an economy depends mostly upon the increase of its citizens. Tax planning determines the production of white money that is in free flow.
Amongst the several major objectives of tax planning is channelization of taxable income to different investment strategies and policies.
Durability is enhanced during the tax planning behind a business is proper.
Decrease of Tax Liability
As a taxpayer, one can protect the highest quantity from the payable tax amount. By using a proper form of their enterprise working as per the essential laws.
Steps of tax planning
Take benefits from the segments of individual salary
The tangible profits that one is allowed to can be demanded up to some amount as a deduction or is exempt in a few cases. The cases can be :
- Leave Travel Allowance
- House rent allowance
- Education allowance
Investment in Deductible Option
Deductions under this section can be immediately demanded in the tax return. Even not significantly claimed through the employer.
Filing ITR heads to the right result in tax planning. In order to leave last-minute troubles, file returns well in advance.
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
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.
Corporate Tax Planning
- Office expenses,
- Health insurance of employees,
- Charitable contributions
- Taking deductions on business transport
- 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.
When tax planning is done under the structures described by the respective officials, it is entirely legal and in fact a bright decision. Though practising smart ways to avoid tax payments is unlawful and one may get into a problem for doing so.
Hence, it is the responsibility of each citizen to carry out perfect tax planning. There are multiple benefits that one can avail with tax saving schemes. Based on their tax slab, social liabilities, and personal choices.
A good tax planning is made by applying the proper blend of investments in order to reduce the tax liabilities.
For knowing about tax saving mutual funds one can log into our website WealthBucket.The online mutual fund investment portal that provides one with the greatest advice and services linked to investments. Our services include equity fund investment, Debt mutual fund, Large Cap mutual fund or Multi-Cap mutual fund. Save taxes by investing in mutual funds.
Give us a call us at +91 8750005655 for more details of the mutual fund investment. One can also email us at firstname.lastname@example.org
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