Tax planning refers to the process of evaluation of a financial plan or circumstances w.r.t taxation to ensure the maximum tax efficiency by harmonizing all the components of a financial plan to work together with tax-efficiency. Tax planning is an integral part of a financial plan that helps in the reduction of tax liability and increment of contributions towards retirement schemes. Besides, different investments and different retirement schemes must go together with the tax filing and the deductions to generate the best possible results. Tax planning lays emphasis on different considerations like the timing of income, timing of purchases, size, and planning connected with different expenditures.
Introduction
Tax planning refers to the process of evaluation of a financial plan or circumstances w.r.t taxation to ensure the maximum tax efficiency by harmonizing all the components of a financial plan to work together with tax-efficiency. Tax planning is an integral part of a financial plan that helps in the reduction of tax liability and increment of contributions towards retirement schemes. Besides, different investments and different retirement schemes must go together with the tax filing and the deductions to generate the best possible results. Tax planning lays emphasis on different considerations like the timing of income, timing of purchases, size, and planning connected with different expenditures.
Role and Types of Tax Planning
Tax planning plays a key role in the financial growth of any individual because one cannot escape from tax liability if his/her income falls under the Income Tax bracket. Proper tax planning helps individuals streamline their tax payments and ensure returns over a particular period of time while reducing the tax liability of the person.
Tax planning can be divided into three kinds of planning which are as follows:
- Permissive tax planning: Tax planning that comes under the legal framework.
- Purposive tax planning: Tax planning that is conducted with a particular objective.
- Long-range/short-range tax planning: Planning that is conducted at the start and towards the completion of the financial year.
Importance and Advantages of Tax Planning
Paying tax is an important responsibility of an individual towards a nation. However, at the same time, with financial planning, you can save your taxes while fulfilling your responsibility towards the nation by using the tax-saving schemes given by the government. This can be done if you follow proper tax planning meticulously designed by a CA or CS professional. Let us deep dive into the advantages of tax planning.
Deduction Benefits
Under Section 80C and 80CC
Individuals and members of a Hindu Undivided Family can avail of benefits under deductions. Under this section, premiums paid during the policy tenure qualify for tax savings, provided that the policy is availed in the individual’s name or in the name of his/her spouse or children.
This type of deduction is eligible only for premium amounts whose values are not more than 10% of the sum total of the amount insured in the policy issued on or after April 1, 2012. For the policy issued before March 31, 2012, a deduction will be eligible for premium payments of up to 20% of the sum insured amount.
As per Section 80C of the IT Act, these benefits are available on investments up to ₹1,50,000 on life insurance products.
Under Section 80CCC
Deductions are eligible only for pension plans. Deductions are allowed for premiums paid towards the scheme for up to ₹1,50,000.
Under Section 80D
Deductions are eligible for individuals or a member of a Hindu Undivided Family alongside the policies availed in the name of the individual, his/her spouse, and dependent children. The maximum limit of the deduction benefit is ₹25,000. However, an additional deduction benefit of ₹25,000 can be availed if the policy is in the name of parents.
| Individual | Exemption Limit | Health Checkup Included | Total Deduction |
|---|---|---|---|
| Self or family | ₹25,000 | ₹5,000 | ₹25,000 |
| Self and family + Parents | ₹50,000 | ₹5,000 | ₹55,000 |
| Self and family + Senior citizen Parents | ₹75,000 | ₹5,000 | ₹75,000 |
| Self (Senior citizen) and family + Senior citizen Parents | ₹1,00,000 | ₹5,000 | ₹1,00,000 |
Under Section 80DD
Premium paid for a policy availed in the name of a disabled dependent is allowed for a yearly deduction of ₹75,000 (Disability is more than 40% but less than 80%). The deduction amount allowed is ₹1,25,000 for severely disabled people (Disability is more than 80%). This deduction is a fixed amount irrespective of actual expenditure.
Under Section 10(10D)
Benefits received under a life insurance policy are exempted from taxation. Such benefits also encompass any amount received out of the policy in bonus form or under Key Man Insurance Policy.
HRA Exemption
HRA exemption is allowed to taxpayers having rented accommodation, i.e., they are eligible to claim exemption on the rent paid by them, provided they furnish the rent receipts given by their landlord. The amount of exemption eligible to claim is the lowest of the following:
- Total HRA availed.
- Total rent paid minus 10% of the basic salary.
- 40% of the basic salary for taxpayers living in non-metro cities and 50% in metro cities, respectively.
Under Section 80E
Section 80E of the Income Tax Act, 1961 allows the deduction of the interest paid (component of EMI) on the education loan when the education loan has been availed. Deduction under Section 80E can be availed for a maximum of 8 years or till the repayment of interest, whichever is earlier. There is no limit on the amount of deduction.
Other Exemptions and Deductions
In addition to these deductions and exemptions, other methods to save taxes include donations made to eligible organizations & charitable homes, allowing tax exemption of 50%-100%. Donations made to charities prescribed under Section 80G allow a 100% deduction. Donations to funds like the Prime Minister’s National Relief Fund, National Defense Fund, and National Foundation for Communal Harmony also allow a 100% deduction. Every taxpayer must smartly optimize their tax liability through tax-saving investments that offer financial growth besides saving tax outgo. All this can be done with proper tax planning.
Key Takeaways of Tax Planning:
- Tax planning is the evaluation of finances from a tax perspective with an objective to ensure maximum tax efficiency.
- Tax planning considerations include timing of income, planning for expenditures, timing of purchases, and size.
- Tax planning is important for every organization, irrespective of size, and it helps in the achievement of business objectives.
- A CA or CS professional can help you with efficient tax planning. So why not avail of professional service?
For expert tax planning services, contact Nayan Saluja & Company today and optimize your tax efficiency!