Understanding Tax Planning
If you are one of the taxpayers, then this blog is for you! It will provide easy-to-follow tips on tax planning, which refers to legally reducing your tax burden. Whether new to taxes or looking to improve your strategy, this blog can help you.
What Is Tax Planning?
It refers to managing your finances from a tax perspective. It involves identifying opportunities to reduce your taxes legally. The overall objective of this planning is to maximise tax benefits to minimise tax liability.
This allows you to end up with more money in your pocket while following the rules. By planning ahead and making informed decisions, you can optimise your tax situation.
Why Should You Consider Tax Planning?
- Maximise Tax Benefits: Tax planning helps you structure your cash flows better. It may include choosing suitable investments and plans offering tax benefits.
- Minimising Tax Liability: The main goal of tax planning is to reduce the tax you must pay. This involves taking advantage of available deductions, exemptions, etc.
- Achieving Financial Goals: Tax planning helps you achieve your financial goals more efficiently and legally.
Tips For Effective Tax Planning
1. Understand Tax Brackets And Choose That Offers More Benefits
In India, the income tax system operates on a progressive scale. This means that the tax rate increases with the rise in income. High-income earners have a higher tax rate than low-income earners. The tax bracket determines the rate at which you are taxed. Understanding the tax brackets and choosing suitable tax regimes can help you optimise your tax planning.
Indian taxpayers have two tax regimes to choose from. Under the old regime, many deductions and exemptions are available, but the tax rates are higher. The new regime is less complex and has lower tax rates but does not provide major deductions.
Income Tax Slab Rates- Old Tax Regime
Bracket | Age below 60 years | Resident senior citizens
| Resident super senior citizens |
Up to INR 2,50,000 | Nil | Nil | Nil |
INR 2,50,001 - INR 3,00,000 | 5% | Nil | Nil |
INR 3,00,001 - INR 5,00,000 | 5% | 5% | Nil |
INR 5,00,001 - INR 10,00,000 | 20% | 20% | 20% |
Above INR 10,00,000 | 30% | 30% | 30% |
Income Tax Slab Rates- New Tax Regime
The tax brackets are similar for individuals (< 60 years, senior citizens, and super senior citizens).
Bracket | Rates |
Up to INR 3,00,000 | Nil |
INR 3,00,001 - INR6,00,000 | 5% (Tax rebate under Section 87A) |
INR 6,00,001 - INR 9,00,000 | 10% (Tax rebate under Section 87A up to INR 7,00,000) |
INR 9,00,001 - INR 12,00,000 | 15% |
INR 12,00,001 - INR 15,00,000 | 20% |
Above INR 15,00,000 | 30% |
The new tax regime does not allow for deductions except the standard deduction of INR 50,000.
If you are eligible for deductions and exemptions, choosing the old tax regime may be useful. Otherwise, the new tax regime might be more beneficial.
Learn more about income tax brackets and exemptions here.
Point To Remember:
- Your salary income is not usually equal to your taxable income. Some deductions (under the old tax regime) are available, including the standard deduction. You pay tax on net income.
2. Make Good Use Of Tax Deductions And Tax Exemptions
Availing important tax deductions and exemptions will help you in effective tax planning. Deductions and exemptions, available for various investments and expenses, can significantly decrease an individual's tax liability by reducing the taxable income.
Important Deductions
Sections | Deduction on | Limit |
Section 80C | Investments in PPF, ELSS, EPF, Sukanya Samridhi Yojana Life insurance premiums and home loan principal repayment | Up to INR 1,50,000 |
Section 80CCD(1B) | Investment in NPS | Up to INR 50,000 over and above INR 1,50,000 of Section 80C |
Section 80D | Premium paid for medical insurance | Depends on the age of the insured |
Section 80TTA | Interest earned from a savings account | Up to INR 10,000 |
Section 24 | Interest paid on a home loan | Up to INR 2,00,000 |
Section 80G | Specified donations | 50% or 100% of the donation amount. It depends on the recipient and scheme |
Section 80E | Interest paid on education loan | No limit. This benefit is available for a maximum of 8 years or until the interest is paid, whichever is earlier |
Important Exemptions
Sections | Exemption on |
Section 10(13A) | House rent exemption for salaried individuals. |
Section 10(5) | The leave travel allowance is received by the employee from the employer. An employee can make the claim twice for a block of four years. |
3. Plan Your Investments Better
It is also important to consider investment from a tax perspective. Investing in tax-saving instruments can help decrease one's tax burden significantly.
Utilise Section 80C and invest in instruments like the Public Provident Fund( PPF), Employee Provident Fund (EPF), Equity Linked Saving Scheme (ELSS), tax-saving FDs, National Saving Scheme (NSC), etc. Under this section, you can avail yourself of a deduction of up to INR 1,50,000 annually.
Also, understand the investment schemes that offer tax-free interest, such as PPF, EPF, and Sukanya Samriddhi Yojana (SSY). Please note that these deductions apply only to old tax regimes.
4. Utilising Short And Long Term Capital Gains
Income from selling a 'capital asset' is termed 'income from capital gains.' These gains are subject to taxation in the fiscal year when the transfer of the capital asset occurs, known as capital gains tax.
Two categories of capital gains are short-term (STCG, when an asset is held for less than 36 months) and long-term (LTCG, when an asset is held for more than 36 months). Managing short-term and long-term gains to reduce tax liabilities can lead to effective tax planning.
An example of different tax liabilities for STCG and LTCG for equity mutual funds is depicted below:
Funds | Short-Term Gains | Long-Term Gains |
Equity Funds | 15% | 10% over and above INR 1,00,000 without indexation |
5. Maintain Proper Records Of Tax-Related Documents
Keeping records is of the utmost importance during tax planning. Accurate record-keeping serves as evidence to support claims like deductions, exemptions, and income sources. Having well-organised records ensures that you can retrieve necessary information whenever required. This further helps in financial management and effective tax planning.
Conclusion
Tax planning is about being smart with your money. It is about legally reducing your tax burden and keeping more of what you earn. There are many incentives provided to taxpayers. The key is understanding them carefully and creating a flexible strategy to benefit from them.
To learn more about investment and financial planning, stay tuned to Grip Invest.
Frequently Asked Questions On Tax Planning Strategies
1. What is the concept of tax planning?
Tax planning involves organising your finances to minimise your tax liability. These methods must be compliant with the law.
2. What is the concept of tax management?
Tax management involves actively managing your tax obligations throughout the year. The goal is to optimise your tax liabilities.
3. When should you start tax planning?
You should start tax planning as early as possible. It is crucial to begin planning right from the beginning of the year.
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