Tax Planning

1. Compute your liabilities

The easiest and quickest way to go about tax-planning is to first get a fix on liabilities that earn a tax benefit. For example, the loan avenue over here that qualifies for a tax benefit is home loans (maximum limit of Rs 100,000 on repayment of principal). So if there is an outstanding home loan, one needs to isolate the principal amount from the interest (in the EMI) to calculate the tax savings under Section 80C.

2. Compute your fixed investments/contributions

The second logical step is to calculate your annual contribution to EPF (employees' provident fund) and life insurance premium. Add EPF's amount to your annual life insurance premium, if any. We have not considered PPF (public provident fund) as a fixed investment simply because it's not fixed as investors can choose to increase/decrease their contribution up to a maximum of Rs 1, 00, 000 (there is a minimum annual contribution of Rs 500 to keep the account active).

3. Invest the balance in suitable avenues

Once you have a fix on your liability (principal amount on home loan), EPF and life insurance contributions, you need to compute how much is still available under the Section 80C ceiling of Rs 100,000. The balance must be invested in avenues that suit your risk profile and help you fulfill your investment objectives. For instance, if you can take on risk and plan to set aside money for your child's education over the next 10 years, then investing in tax-saving funds (also known as ELSS - equity-linked saving schemes) could be the answer. If you can take on only moderate risk, then you could divide the money between tax-saving funds and PPF. The idea is that you should invest exactly where your risk appetite and investment objectives permit you to invest.

4.Monitor the process of tax planning:

Tax planning is not a one-time activity. It is a process which needs continuous monitoring and planning. Manage any surprise income like a bonus, investment maturity and emergency expenses and provide for them.

1. Minimizing tax liability:

You (assessee) can save tax by making investments in tax-saving financial instruments, thereby saving taxes.

2. Minimizing litigation:

Proper tax planning saves you from penalties and even litigation, in case the tax department decides to take legal action against you for tax evasion.

3. Making investments productive:

Tax planning encourages tax-payers to invest in tax-saving instruments. Your money earns interest and you also enjoy the tax benefits.

4.Economic growth:

Tax planning helps pump money into the right investment avenues like tax saving financial instruments. The Government gets to use this money for infra projects and so on, leading to the growth of the economy.

1.Short-term:

Short-term tax planning is made keeping in mind yearly financial goals. This helps in achieving specific, limited and short-term objectives.

2.Long-term Tax Planning:

Long-range tax planning is made for the long-term. The benefits of such tax planning are not realized immediately.

3. Permissive Tax Planning:

Permissive tax planning is done as per the provisions of tax laws.

4.Purposive Tax Planning:

Purposive Tax Planning is the exact opposite of permissive tax planning. It refers to tax planning which circumvent laws.For example, the provisions of Section 60 to 64 of the Income Tax Act, 1961, require income earned by others, to be included in an individual assessee’s total income. For example, a minor’s income is clubbed with that of the parent, who is the higher earner. As such, an assessee tries to avoid these provisions.

1.Tax exemptions, deductions and a rebate can be claimed up to the date of filing income tax returns.

2. Tax planning saves you from severe penal consequences, as the law reduces the scope of tax avoidance.

3.The government provides incentives through tax laws, encouraging citizens to save tax.

4.Tax planning ensures that you plan your expenses well. For companies, it helps in capital budgeting, sales promotion and so on.

5.When interest rates are high, the amount saved in the form of taxes is as good as an interest-free loan from the Government.

6.Companies can claim repairs, renewals, depreciation on Plant and Machinery and also deduct business expenses, giving them more money to invest in the business.

7.Tax planning can reduce taxable income and capital gains. It gives you a clear picture of your savings, investments and pensions.

8.Tax planning can help with estate planning. Many investments need investors to mention a beneficiary or a nominee. This ensures that your assets pass directly to your heirs.