Income Tax Planning and its benefits

Introduction to Tax Planning

Tax Planning is an intellectual process that makes one's financial position tax efficient. It refers to all those activities undertaken by taxpayers to ensure that their tax liabilities are minimised and benefit of all the available deductions, allowances and exemptions have been availed and are working in a coordinated manner. Thus, it is a process that analyses one's financial position from the point of view of tax efficiency.

As a taxpayer, you may have multiple sources of income:

• Income from House Property,
• Salaries,
• Income from Business or Profession,
• Capital Gains and
• Income from Other Sources.

Irrespective of your source of income, you need to pay taxes to the government depending upon the slab rates. Thus, the focal point of a good tax plan is to mitigate the tax burden and increase the savings, while conforming to the legal obligations.

Why to opt for Tax Planning?

Tax planning is an integral part of your business and it is your loss if you do not make the best use of the deductions and exemptions provided by the government. It helps in achieving the business and financial goals and provides various benefits to both large and small industries. Taxes will have a heavy impact on your earnings so, a tax plan is important for the management of your wealth. In today's dynamic environment, it is important to be aware of the changes in tax laws and have strategic plans so that you pay only as much as you owe.

Benefits of Tax Planning

• Tax exemptions, deductions, and rebates can be claimed when you know about taxes in detail. It also ensures that you plan your expenses well and save more.
• Tax planning saves you from strict penalties as the law reduces the chance of tax avoidance.
• Reduces your tax rates and capital gains.
• Allows you to have greater control of when taxes are paid like advance tax
• Minimises litigations by resolving tax disputes with different levels of authority. There is a lot of friction between tax collectors and payers as the former always try to extract the maximum amount of taxes. Thus, minimising litigation through proper tax planning saves taxpayers from legal liabilities.
• Ensures economic stability. Proper tax planning and management maintain a healthy inflow of money and it can be devoted to the betterment of the country. This benefits both the citizens and the economy.
• Helps in enhancing productivity. Efficient tax planning channelizes funds from taxable sources to various income-generating options.

Some of the mediums to save taxes

If you are confused about how to plan your taxes well and avail the above-mentioned benefits, the following points can help you in making tax planning:

Salary restructuring

Various sharp witted ways to reduce their taxes are House rent allowance, Conveyance allowance, Leave travel allowance, Meal coupons, gift vouchers, telephone or internet expenses, etc.

Retirement Planning

The absence of salary after retirement becomes a problematic situation if enough funds are not available to manage the expenses. Some tax saving tips for a secured future are here :

a. Opt for annuity schemes, like Senior Citizen Saving Scheme u/s 80C which provides a regular income in your old days and also helps you to save taxes. It is available for individuals above 60 years of age and provides tax benefits.
b. Unit linked Insurance Plans also serve as good means for fund creation and saving on taxes. ULIPs provide tax benefits u/s 80C and also allow you to withdraw tax free proceeds at maturity u/s 10D.
c. Contributing money to a Traditional Individual Retirement Account will reduce the gross income by the amount contributed.

Deductions under various sections

• Deduction u/s 80C: It provides some of the most useful options to minimize the tax payout ratio. A tax benefit of as much as Rs 1,50,000 can be availed. Expenses on life insurance premium, contributions to employee provident fund, school fees, repayment towards home loans, everything can be claimed u/s 80C.
• Deductions u/s 80D: If a premium is paid for medical or health insurance of Self, Spouse, Children and Parents, a maximum deduction of Rs 25000 in case you are below 60 years of age and Rs 50,000 for above 60 years of age is allowed.
• Deductions u/s 80DD: Deductions up to Rs 75,000 or Rs 1,25,000, depending upon the circumstance, are provided to an employee for the expenses incurred on the treatment and maintenance of his disabled dependent.
• Deductions u/s 80E: The interest paid on an education loan in a financial year is eligible for deduction u/s 80E.
• Deductions u/s 80TTA and 80TTB: This is the easiest deduction an individual can claim, provided the taxpayer is keeping some money in a savings account. The interest earned on savings accounts is tax free up to Rs 10,000 u/s 80TTA and up to Rs 50,000 for senior citizens u/s 80TTB.
• Deductions u/s 80U: Taxpayers can claim deductions up to Rs 1,25,000 in case they suffer from certain disabilities or diseases.

Frequently Asked Questions (FAQs)

Q1) Why do people need tax planning?

Ans) The main objective of tax planning is to maximize cash inflow and minimize cash outflow. Since tax is a type of cost incurred, its reduction would increase the profitability of any business. Every prudent person, to maximize his return, will use the tool of Tax Planning.

Q2) How should tax planning be done?

Ans) Tax Planning should always be done before the accrual of income. Any planning is done after it is known as the application of Income which may result in fraud. Therefore, tax Planning should resort to the source of income.

Q3) What are the objectives of tax planning?

Ans) The objectives of tax planning include :

• Reducing tax liabilities.
• Minimizing litigation.
• Increasing productivity.
• Economic growth.
• Economic stability.
• Retirement planning.
• Investment vehicle.

Q4) What is the maximum amount of income tax deduction allowed under section 80C?

Ans) The maximum tax deduction under section 80C is Rs 1,50,000. It includes the total amount of tax deducted u/s 80C, 80CCC, and 80CCD.

Q5) What is the amount of House Rent Allowance exempted under the Income Tax Act?

Ans) Exemption from House Rent Allowance will be the least of the following :

• Actual amount of House Rent Allowance.
• 50% of basic salary if the individual resides in Delhi, Chennai, Kolkata, or Mumbai; and 40% if his residence is in any other city.
• Actual rent paid 10% of basic salary.

The author is a Practicing Chartered Accountant with more than 6 years of experience.