Tax Planning : Why should you Plan your Tax Savings in Advance?

  • Posted By : reliancesmartmoney.com
  • Monday Dec 23, 2019

While planning your taxes, you might have obviously focused on reducing your tax deductions.  However, did you also focus on increasing your returns? Tax planning is not just about tax saving; tax planning has a broader picture where you can benefit by advance tax planning in the long-run. Taxes can be planned any time before the tax return filing deadline.

What is tax planning?

Tax planning is an analytical activity of assessing one’s financial affairs or dealings, in such a way that ensures tax efficiency and reduced liabilities by legitimate means, i.e. utilizing all sort of provisions such as deductions, rebates, allowances, and exclusions provided under tax laws.
Also defined as, “An activity conducted by taxpayers and businesses to arrange financial affairs in a manner that lower down tax liability and ensures saving of taxes along with the conformity to the legal obligations.”

Objectives of tax planning

It doesn’t matter how much income you generate or how you manage your investments – to ensure perfect tax saving, you will be required to set up tax planning objectives for better use of tax provisions in achieving maximum benefit of tax laws in India.
Here, we have mentioned some key objectives of tax planning in India:

  • Reduction of tax liability & minimum litigation:
  • Undoubtedly, it is the first and foremost when setting up tax planning objectives. The tax authorities or collectors expect to get maximum tax while an individual tries to save taxes as much as possible for the personal benefit. Some individuals or companies move towards objectionable activities like tax evasion that increase the possibility of litigation. However, one can reduce the overall tax liabilities and minimize the incidences of litigation in taking advantage of available provisions such as exemptions, deductions, rebates, etc. in such a way that help them saving taxes while conforming the tax obligations.

  • Productive investment:
  • Productive investment is one of the key objectives of the tax planning where the taxpayer can opt for government-approved tax saving options within the Income Tax Act, 1961 for channelization of taxable income to various tax-saving investment plans. This productive investment planning results in higher returns and reduces tax liability.

  • Economic stabilization & growth:
  • Tax is more than just a source of revenue, plays a vital role in the country’s economic stability through making the states accountable to the taxpayers. Tax evasion has already dented the country’s economy multiple times. When the taxes are paid on time, there is timely circulation of money in the market, giving the taxpaying individuals and businesses to grow with the economy.

Tax planning in India – for individuals using Section 80C, 80D and 24

To ensure proper tax planning, Indian tax laws provide numerous opportunities and provisions for Indian individuals and corporate to avail a wide range of tax exemptions and deductions to reduce overall tax liability. To reduce the tax burden, there are various sections for individuals under the Income Tax Act, 1961 wherein the government provides with opportunities to do tax planning in a legal manner to save on taxes.

  • Section 80C
  • Under Section 80C of Income Tax Act, 1961, there are various tax-saving investment options for individuals to invest in, to save on taxes and channelize the taxable income to generate high returns.
    The key instruments include:

    • Equity Linked Savings Scheme (ELSS)
    • Public Provident Fund (PPF)
    • Employment Provident Fund (EPF)
    • National Savings Certificate (NSC)
    • National Pension Scheme (NPS)
    • Life Insurance
    • Senior Citizen Savings Scheme
    • Sukanya Samriddhi Yojana
    • Tuition Fee
    • Home Loan

    Within investments in these tax-saving options, one can claim deductions up to Rs. 1,50,000 under Section 80C, Income Tax Act, 1961. Apart from this, there is an additional deduction of Rs. 50,000 with the Rs. 1,50,000 limit for NPS Tier 1 investments under section 80CCD of the Income Tax Act, 1961.

  • Section 80D
  • For individuals, Sec 80D allows an option to claim a deduction of up to Rs 1 lakhs on the account of the medical insurance premium and medical expenditure. An individual can get a deduction of Rs 25,000 for himself, spouse and dependent children (Rs 50,000 if he is a senior citizen) and Rs 25,000 for parents (Rs 50,000 if parents are a senior citizen).

  • Section 24
  • Under Section 24, an individual can enjoy exemption under two different parameters as:

    • Standard deduction of 30% of net annual value. This clause is not applicable if you occupy the only house you own.
    • Interest on loan borrowed for purpose of acquisition, construction, repair or renewal of home of up to Rs 2 lakhs.

Common mistakes to avoid while Tax Planning

Tax planning can be a little troublesome and a bit complicated if not done well. There are a lot of permutations and combinations when planning to save taxes and reduce tax liability. That’s why it is important to understand the importance of tax planning and considering its nature to better manage your financial affairs to ensure tax efficiency.
To help you better, we have mentioned some common mistakes to avoid while tax planning:

Waiting for last moment:

When it comes to tax planning, many people tend to make the mistake of waiting for the last moment. Instead, one should plan for taxes at the beginning of the year to better manage the affairs as per the provisions under the Income Tax Act.

Failing to benefit from tax saving options:

Many taxpayers are not aware of the provisions of deductions and exemptions given under Section 80C, 80D, and 24 of Income Tax Act, 1961 and often end up investing in non-taxable instruments. However, they can reap the benefits of the provisions given in Indian tax laws and invest in instruments that not only save them taxes but also provide with the opportunities of wealth creation.

Investing in insurance products at the end of the year:

It has often seen that many people start receiving calls from insurance companies at the end of the financial year, pitching to purchase the insurance plans to save tax. Some people make mistakes to buy insurance policies at the end of the year. As a result, their plan to save taxes backfire them and they end up picking the wrong product which they believed to maximize their tax efficiency and reduce tax liability. Do not make such a mistake!

Fail to correctly calculate the tax liabilities:

When we make plans for saving taxes in hastiness, we often miscalculate our tax liabilities and end up paying more taxes. It is wise to avoid such errors in calculating tax liabilities while planning for taxes.

Benefits of early tax planning:

  • Can adjust funds 

If you plan your tax savings towards the end of the year you might just fall short of funds for investing. Thus, by planning your investments in advance, you can save from your monthly salary. In fact, tax saving schemes like the Equity Linked Savings Scheme (ELSS) allow you to invest every month.

  • Plan your taxes and investments at once 

You might have heard about a variety of tax saving schemes like the Public Provident Fund (PPF), the National Savings Certificate (NSC), Fixed Deposits (FDs) and ELSS. The tax saving amount will be the same for all these schemes (Rs. 1.5 Lakh according to Section 80C), but returns will be different for them. 

ELSS (a type of mutual fund investment where more than 80% of your funds are invested in equities) provides you returns better than all the other schemes, but, you need to choose the right investment basket. An early tax planning gives you ample time to choose an appropriate investment option for yourself.

  • Can use tools 

Early planning gives you ample time to compare your investments with tax saver tools available online. Tools like RoboAssist help you choose the right investment basket in case of ELSS investments. The tool can guide you to the right investment option that suits your goals, help you save taxes and plan your goals at the same time. All you need to do is plan your taxes early, to get the best from these tools.

  • Power of compounding 

The earlier you start the better compounding works for you. All tax saving schemes have a lock-in period. The earlier you begin, sooner the lock-in period will provide you with compounded returns.

  • Faster refunds 

Planning your tax savings early will enable you to file your returns on time. This, in turn, will help ensure your refunds are processed quickly.

Planning your taxes way in advance gives you a chance to explore and compare various tax saver options. Tax planning should not be an activity to be done at the end of the financial year, but a round-the-year exercise. By planning your taxes early, you can convert your tax saving scheme into a high return investment. Start your tax planning  now to get better returns and avoid hassles of last minute submissions with reliancesmartmoney.com

Plan your tax savings in advance - reliancesmartmoney.com

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