In India, income tax treatment follows a progressive system, which means the more you earn, the higher the percentage of tax you pay. However, the good news is that the Income Tax Act of 1961 offers various provisions that can help you reduce your tax liability. If you tackle income tax smartly and with proper planning, you can take advantage of the deductions and exemptions allowed by the Government and save money while staying fully compliant with the law. Let’s understand the meaning and objectives of tax planning, and look at some strategies to help you legally reduce your tax burden.
What is Tax Planning?
Tax planning helps you minimise the amount of tax you need to pay legally and efficiently. With this process, you arrange your finances, things like investments, insurance, salary structure, business structure, and more in such a way that you take full advantage of the available deductions, exemptions, and tax-saving opportunities. With this, you ensure that you’re paying the least amount of tax you are legally required to.
During the Union Budget 2020/21, the Government announced a new tax scheme called the new tax regime. Taxpayers have the option to choose between the old and new regimes based on what suits them better.
Old tax regime: This structure has higher tax rates, but allows a wide range of exemptions and deductions, like Section 80C, 80D etc. The rates also depend on the age of the taxpayers. For example, senior and super senior citizens enjoy higher basic exemption limits compared to those below 60. This regime is more suitable for those individuals who make full use of tax-saving investment opportunities.
New tax regime: This new structure is a lot simpler than the old one. Individuals are taxed regardless of their age, and most exemptions and deductions are not allowed. However, in return, you get lower tax rates which makes the new regime a good option if you don't claim many deductions.
Before filing taxes, you should calculate your liability under both the old and new regimes to see which one saves more money for you. A tax planner can be really helpful in this process. Professionals can analyse your liability, income, deductions, and exemptions to help you make the most tax-efficient choice. Also, they provide personalised advice on how to optimise your tax planning for the future.
Tax Planning Strategies in India
Here are some common strategies people use to reduce their taxable income:
Claiming Deductions and Exemptions
The Income Tax Act allows a variety of benefits, such as:
Section 80C: This is the most popular way of reducing taxable income. By investing in certain investments like PPF, EPF, ELSS, and life insurance, one can claim a deduction of up to Rs. 1.5 lakh.
Section 80D: Premiums paid towards health insurance for self, spouse, children, and parents are deductible up to certain limits depending on the insurer’s and their parents' ages.
Section 80E: Interest payment towards education loans is deductible with no upper limit.
Section 24(b): The interest paid on home loans can also be deducted up to Rs. 2 lakh per year (for self-occupied properties).
Section 80CCD(1B): An extra Rs. 50,000 can be deducted above the Rs. 1.5 lakh limit of 80C when you contribute to the NPS. This is one of the rare deductions that can be claimed under both regimes.
Section 80G: Donations to eligible charitable institutions are also deductible. Depending on the organisation, either 50% or 100% of the donation amount can be subtracted from the taxable income.
The Act allows for many more deductions and exemptions such as those for HRA, LTA, savings account interest, disability, and medical treatment. To make the most of these benefits, you'd be wise to consult expert tax consulting services who can analyse your situation and give you personalised guidance on tax-saving strategies applicable to you.
Opting for the Suitable Tax Regime
Those without many tax-saving investments can get a lower liability under the new regime thanks to its lower rates. To check your tax liability under both regimes, you can use an online tax calculator and select the suitable structure.
Claim Capital Gains Exemptions
Long-term capital gains can be exempt for certain assets under specific circumstances. For example, profits from an equity mutual fund investment held for more than 12 months are exempt up to Rs. 1.25 lakh per financial year. Similarly, LTCG from a property can be exempt under Sections 54, 54F, or 54EC if the gains are reinvested in a new residential property or specified bonds (like NHAI or Railway bonds) within a specified time.
Objectives of Tax Planning
Objectives of tax planning include:
Minimising Taxable Income
Taking advantage of the deductions and exemptions available under the Income Tax Act can help you significantly reduce the portion of your income that’s taxable and reduce your outgo.
Boosting Savings
The less tax you pay, the more you save. These savings can be put to work by investing in instruments like mutual funds, bonds, or retirement plans.
Ensuring Compliance and Reducing Chances of Litigation
One of the main goals of tax planning is to ensure that tax saving happens within the legal framework. You can avoid unnecessary penalties and notices from the tax department, and enjoy peace of mind knowing your finances are in order.
Helping You Realise Your Financial Dreams
You can align your savings and investments with your long-term goals such as buying a home, funding your child’s higher education, or planning for retirement. For example, a tax planner may suggest instruments like ELSS, which can help you generate high returns in the long term while also saving taxes under Section 80C.
Conclusion
One should ideally start their tax planning as early as possible. Last-minute planning leads to missed opportunities for savings due to hasty decisions. The main Objectives of tax planning are not just to help you reduce your tax burden, but also to ensure your tax-saving investments align with your financial goals and risk tolerance while complying with the law. A tax planner can help you save as much of your hard-earned money as possible through personalised strategies, and also help you timely and accurately file your taxes.