Tax planning refers to the process of arranging one's financial affairs in such a way that the tax liability is minimized, within the boundaries of the law.
What is the meaning of tax planning?
Tax planning is finding ways to reduce the tax burden and maximize the savings. It is an important aspect of financial planning and is a crucial step in ensuring financial stability and independence. In India, tax planning is necessary because the Indian tax system is complex and the tax laws are subject to frequent changes.
Tax planning in India
In India, the main sources of income tax are salary, business income, and capital gains. The tax liability is calculated based on the taxable income, which is the total income minus the deductions and exemptions available under the Income Tax Act. The tax liability is calculated on a slab system, with different tax rates applicable to different income levels. As of the financial year 2022-23, the tax rates for individuals range from 10% to 30%.
One of the most important aspects of tax planning in India is to make full use of the deductions and exemptions available under the Income Tax Act. Some of the most common deductions include investments in specified savings instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Life Insurance Premiums, Medical Insurance Premiums, and Home Loan Principal Repayment. By making full use of these deductions, an individual can significantly reduce their tax liability.
Another important aspect of tax planning in India is to optimize the structure of one's investments. For example, investments in tax-free bonds, tax-saving mutual funds, and equity-linked savings schemes (ELSS) can provide tax benefits and help reduce the tax burden. Furthermore, investments in real estate can also provide tax benefits, as the income from rent and capital gains on the sale of property are both taxable.
Additionally, tax planning in India allows you to optimize the tax treatment of various business expenses. For example, the cost of employee training and development, travel expenses, and business promotion expenses can be claimed as business expenses and can be used to reduce the taxable income. Also, expenses incurred on the maintenance of a vehicle used for business purposes can also be claimed as a deduction.
In India, tax planning is not only limited to individuals but is also relevant to businesses. Businesses can take advantage of various tax incentives and deductions available under the Income Tax Act, such as deductions for scientific research, investment in plant and machinery, and depreciation on fixed assets.
Benefits of tax planning
Minimises litigation: Litigation means to resolve tax disputes with local, state, federal or foreign authorities. Often, there is friction between tax collectors and taxpayers as usually the tax collectors try to extract the maximum amount possible while the tax payers want to keep their tax liability to a minimum.
Reduces tax liabilities: There’s no denying that taxpayers think of ways to reduce their tax burden and save money for their future. Typically, taxpayers can reduce their payable tax by arranging their investments within the benefits offered under the Income Tax Act,1961. You can choose different investment schemes to reduce your tax liability.
Better economic stability: Taxpayers’ money is utilized to build the country. So,effective tax planning and management ensures there is a good flow of white money that will result in the country’s progress. This is helpful for both the citizens as well as the economy.
Boosts productivity: One of the main objectives of tax planning is to channelize the funds from taxable sources to different income-generating schemes. This helps in better utilization of funds for productive causes.
How to save taxes?
There are different options you can consider to save taxes. Also, different sections under the Indian income tax law offer tax deduction and exemptions. Section 80C is a popular tax-saving method. For instance, Five Year Bank Deposits, National Savings Certificate , Deposits in Public Provident Fund , Investment in ELSS schemes are different tax saving schemes included under section 80C.
In conclusion, tax planning is a crucial aspect of financial planning in India. By making full use of the deductions and exemptions available under the Income Tax Act, optimizing the structure of investments, and optimizing the tax treatment of business expenses, individuals and businesses can reduce their tax liability and maximize their savings. It is advisable to seek the help of a professional tax consultant or financial advisor such as Wisely Invest for effective tax planning. Regular review and updating of the tax plan is also necessary to ensure that it remains relevant and in line with the changing tax laws.