Income Tax Planning
Income Tax Planning is a fundamental and essential analysis of one's financial profile. The primary purpose of Tax planning is to eliminate or minimize the burden of tax liability and ensure optimum planning of income.
Income Tax Planning refers to the efficient planning of one’s income and saving taxes by employing various rebates, allowances, deductions, and exclusions available under the Indian Income Tax Act, 1961.
Tax Planning In India
The tax planning system in India is organized and planned as per the terms and conditions of the Income Tax Act, 1961.
The deductions, exemptions, and rebates available in the Indian tax system offer ample tools to the taxpayer for tax saving.
Benefits of Tax Planning
Some key benefits of Income-tax planning are as follows:
- Complying with the income tax guidelines lowers legal complications between taxpayers and the tax collecting authorities
- Investment of funds in various tax saving instruments leads to a profitable investment of the taxpayers' money
- An efficient tax planning provides the taxpayer with a huge corpus in the long run
- An efficiently planned tax system leads to the all-round growth of the economy
- The entire tax planning machinery aids in maintaining the stability of the economy
Categories of Tax Planning
Income Tax Planning is categorized into four main types. These categories are mentioned below.
Long Term Tax Planning
When a taxpayer plans his finances at the start of the financial year to reduce the tax burden, it is known as Long term Income tax planning or Long Term Tax planning.
Short Term Tax Planning
When the tax-saving investments are planned near the end of the financial year, it is known as Short Term Tax-planning or Short Term Income tax Planning.
Permissive Tax Planning
When the investment instruments are selected keeping in mind the concessions, rebates, and deductions available, it is known as permissive tax Planning or permissive Income tax planning.
Purposive Tax Planning
When strategic decisions such as selecting the ideal investment instrument, expanding business, replacing obsolete assets with new and productive assets, etc. are taken to avail the maximum benefit of tax planning, it is known as Purposive Tax Planning or Purposive Income Tax planning.
Some Pointers for Saving Tax on Income
Below are some pointers to save income tax:
Health Insurance Policy
- Health Insurance policy can be bought for self, children, or spouse
- Up to Rs 15000.00 paid on health Insurance policy premium, for self, spouse, or children, is valid for deduction as per the Income Tax Act
- Both employer and employee of an organization contribute towards the Employee Provident Fund
- All contributions made by an employer are exempted from tax and the contributions made by the employee are eligible for income tax deductions.
Public Provident Fund
- Another popular tax saving instrument is the Public Provident Fund (PPF). Investments made in a PPF account earn an annual compounded interest
- The instrument has a maturity period of 15 years with the minimum amount that can be contributed towards this fund is Rs 500
- Contributions made towards a PPF account are eligible for tax deductions
- Donations made by an individual are exempted under the Income Tax Act up to a certain limit
- Donations made to NGO’s or charitable organizations are valid for tax exemption
Life Insurance Premium
- Life insurance premiums for insurance policies for children, spouse, or self are eligible for tax exemption
- The total amount for all policies combined that can be claimed for deductions is Rs 1.5 Lakh
National Savings Certificate (NSC)
- This is another popular tax-saving instrument that credits interest semi-annually. Under this scheme, Indian citizens are allowed to invest for 5 years or 10 years
- The minimum amount that can be invested is Rs 100 while there is no cap on the maximum amount that can be saved
- A maximum amount of Rs 1.5 Lakh can be claimed for tax deduction under the Income Tax Act
- Gifts received by an individual at the time of marriage are free from tax
- These gifts can be in the form of cheque or cash
Equity Linked Savings Scheme (ELSS)
- These are mutual funds that are designed to save tax
- All funds categorized as ELSS are eligible for tax deduction under section
Unit Linked Insurance Plans (ULIPs):
- These plans are popular among investors
- Investment in ULIP’s offer good returns over a long period and tax benefit
Post Office Deposit Scheme for Five-years
- The deposit schemes offered by the post office for 5 years are eligible for tax deductions
- The deposits scheme of the post office is similar to the tax-saving fixed deposit offered by Banks
EMI of Home Loan
- The EMI of the home loan that goes towards the payment of the principal amount is eligible for a tax deduction. However, the EMI that goes towards the payment of interest component of the home loan is not eligible for deduction.
- The receipts or bills of the medical expense incurred for self or dependent family members are exempted from tax up to a specific limit
Senior Citizen Savings Scheme
- This scheme allows senior citizens, above the age of 60 years, to earn tax benefits
- The scheme is quite attractive with its quarterly interest payment and will enable citizens to claim tax benefits up to Rs.1.5 Lakh
- Any investment in these bonds is eligible for a tax deduction
Exemption on Travel Allowance
- Salaried employees can claim up to Rs 1600 every month as a travel allowance from their company
- The total amount available for travel or conveyance allowance is Rs 19,200
Sukanya Samriddhi Scheme
- Parents can avail this scheme of a girl child from the time of her birth until the time she turns 10 years old
- The amount that can be invested in the scheme ranges between Rs 1000- Rs 1.5 Lakh in a given financial year
- The interest compounded annually in this scheme is eligible for tax deductions
NABARD Rural Bonds
- Investment under this scheme is eligible for tax deductions up to Rs 1.5 Lakh
- In addition to the investment mentioned above instruments, some other options to avail tax deductions include contributions made to National Defence Fund and contributions made to The Prime Minister's National Relief Fund. These contributions and donations are eligible for 100% deduction under the Income Tax Act
Importance of House Rental Allowance (HRA) in Tax Planning
The house rent paid by individuals is eligible for tax deductions under the HRA exemption mentioned in Section 10 (13A) of the Income-tax Act, 1961). The amount of HRA eligible for deductions is decided on the following factors.
- The total amount of HRA received
- The total amount of rent paid by the individual is reduced by 10% of the basic salary
- In the case of taxpayers residing in non-metro cities, the amount is 40% of the basic salary while for taxpayers living in metro cities the amount is 50% of the basic salary
Ans: The main purpose of tax planning is to lower the tax liability by reducing the taxable income.
Ans: The difference between tax planning and tax avoidance is as follows:
- Tax planning refers to the process of planning finances and making use of the deductions, rebates, and concessions allowed by the government
- This is done to lower the tax burden through government-approved means
- While indulging in non-legal and unacceptable activities to avoid tax is known as tax avoidance
Ans: When unlawful means are used to evade tax, it becomes a punishable act under the law and is termed a tax evasion.
Ans: Some sections of the income tax act that offer ways to save tax are mentioned below:
- Section 80C, 80CCC, and 80CCDD up to a limit of Rs1.5 Lakh
- The health insurance premium under section 80D
- Section 80DD for the treatment of handicapped dependents
- Education loan under section 80E
- Donations made under section 80G
Ans: The interest earned on most tax saving instruments is not eligible for tax deductions except for investment in the national Saving Certificate.
Ans: Yes, non-payment of taxes is a punishable offence and can lead to imprisonment.
Ans: Any of the following penalties can be applied as per the decision of the income tax officer for the non-filing of taxes.
- 10% penalty for any undisclosed income
- 50% penalty for under-reporting the income
- Penalty ranging between Rs 10,000.00 -Rs 1,00,000.00 for not presenting or presenting an incorrect statement of TDS or TCS
Ans: The main motive or goal of tax planning is to have the efficiency of tax and reduce the taxable income of the taxpayer.