Tax planning means analyzing your financial situation, from the point of view of tax efficiency. It helps a taxpayer employ tax exemptions, deductions and benefits to minimize tax liability and optimize finances. Tax planning is different from Tax Evasion. Tax Planning is legal, whereas tax evasion is not. Tax planning aims at availing tax benefits through legitimate means on the lines of provisions and relaxations provided in tax laws.
Tax Planning tips in India
- Deferring income is a good strategy to save tax. Deferring income means postponing your income to a future time. By deferring your income, you can claim deductions now, when tax rates are higher. These investments would mature in the future, when rates might be lower. So, you will gain today as well as in the future Pay off expenses on time:
- Pay off your expenses on time. This allows you to claim tax deductions and also save tax. Remember to record all the expenses that you make, so that you do not forget to claim them. Deductions on expenses like insurance premiums can only be claimed in the previous year after the payment is made. Plan your charity:
- Yes, charity should be selfless, but that doesn’t mean you cannot avail tax benefits on charitable activities. If you think your taxable income is simply too much, plan to give some in charity. Then, claim deduction on the same and save tax! Make it a continuous process:
- Tax planning should not be a one-time activity. You have a whole year to plan your expenses, investments and taxes. Therefore, keep monitoring your finances and tax planning strategies. If you find some aspects of your tax planning are going out of hand, you have time to fix the issue well in advance, rather than pay a fortune in tax or penalties. Life Insurance Plans:
- Avail Life Insurance Plans to save tax. They have dual benefits; you save tax in the form of premium payments and your life is insured. Be sure to buy a life insurance plan that suits your needs. Both life insurance plans (term or endowment), enjoy tax deductions up to Rs 1.5 lakhs a year under Section 80 C, on the premiums paid. Invest in Tax Saving Instruments:
- You may invest in PPF, ELSS, NSC, 5 year tax saver FDs and other tax saving instruments to save tax. If you have a girl child, you open a Sukanya Samriddhi Yojana (SSY) account in her name and make regular contributions to save tax.
Tax Planning Goals
The goal of tax planning is to arrange financial affairs so as to maximize one’s taxes. Tax-planning is also as much about contributing to financial goals as it is about reducing ones tax liability. Few investment options that help us to save tax:
- Employee Provident Fund (EPF)
- Public Provident Fund
- National Savings Certificate
- Long Term Government Securities
- Bank Deposits
- Life Insurance Products
- Pension Products
- Mutual Funds
Importance of Tax Planning
- Tax exemptions, deductions and a rebate can be claimed up to the date of filing income tax returns.
- Tax planning saves you from severe penal consequences, as the law reduces the scope of tax avoidance.
- The Government provides incentives through tax laws, encouraging citizens to save tax.
- Tax planning ensures that you plan your expenses well. For companies, it helps in capital budgeting, sales promotion and so on.
- When interest rates are high, the amount saved in the form of taxes is as good as an interest-free loan from the Government.
- Companies can claim repairs, renewals, depreciation on Plant and Machinery and also deduct business expenses, giving them more money to invest in the business.
- Tax planning can reduce taxable income and capital gains. It gives you a clear picture of your savings, investments and pensions.
- Tax planning can help with estate planning. Many investments need investors to mention a beneficiary or a nominee. This ensures that your assets pass directly to your heirs.