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What is Tax Planning?

Indian taxpayers consider savings and investments as a critical part of their overall financial planning, but very few people integrate dedicated tax planning into it. Tax planning can be a great way to reduce tax liability by making prudent investment decisions.

Taxes* are an integral part of financial planning. An optimal tax calculation and planning can save you money in the present and help you create wealth in the long run. Therefore, every professional earning a living and a taxable income should know about tax planning in income tax.

So, if you want to learn more about tax planning and management and the limitations of tax planning, this blog can guide you.

What is Tax Planning?

In simple terms, tax planning is a way of figuring out ways to reduce your tax liabilities in a financial year. Several sections and subsections of the Indian Income Tax Act allow tax deductions, rebates and exemptions for Indian taxpayers. Tax planning gauges these possibilities and finds the right path to save hard-earned money from taxes.

A person earning ₹10 lakhs per year pays roughly ₹78,000 to ₹1.06 lakh in income tax without any tax planning. Now, considering the rising inflation that is already affecting the value of money, paying a substantial amount in taxes can really impact a person’s living standards.
 

If you can also relate to the scenario, it is time you take countermeasures and ensure detailed tax planning.

Objectives of Tax Planning: Why Should You Do Income Tax Planning?  

There are some fundamental objectives of tax planning. Prudent tax planning can reduce the tax liability by arranging the assessee's financial plan - investments, savings, etc. - according to tax decisions.

When we mention reducing the tax liability,  it does not mean it is done in any unsolicited way. Tax planning is done in compliance with the provisions under the taxation laws of India.

Tax planning can save you money that you can invest to secure your future. And you will be glad to know often, it is investing money that leads to tax benefits. Tax planning infuses legitimate cash into the economy, boosting the nation’s growth and development.

Now that you understand the importance of tax planning, let us take you through the different types of tax planning in India.

Who Should Plan Their Taxes?

Every person who is earning and paying taxes should have a tax plan. Whether you are a salaried individual or a self-employed person, you are entitled to tax savings under the Income Tax Act.

In this blog, we will discuss,

  • Tax Planning for Salaried Individuals
  • Tax Planning for Domestic Businesses and MSMEs
     

With that said, whatever your source of income is, you must have a tax plan that follows a particular chart. Before we delve deeper into tax planning measures ideal for salaried individuals or business owners, here is an overview of what tax planning should look like.

Follow These Types of Tax Planning in India

Any professional, salaried or not, who comes under the tax bracket in India must pay income tax. Since tax planning can be integral to your financial journey, you should streamline your tax payments.
 

So, first things first, you need to have an objective before proceeding with income tax planning. Whether you just want tax relaxation for the current financial year, or you want to save taxes and channelise that wealth into securing your future.

Not to mention, you have to start early in the fiscal year. It will help you avoid hasty decisions that often go rogue and fail your tax planning and tax management.
 

  • Short-range Tax Planning for Short Term Benefits
    You can plan your taxes in two different time horizons: long-term and short-term. Short-term tax planning is usually designed at the end of the financial year when the assessee looks for ways to mitigate tax liability. It does not require any long-term planning.

  • Long-range Tax Planning for Long-term Benefits
    On the contrary, long-term tax planning is done at the beginning of a fiscal year and requires proper wealth distribution. The assessee needs to follow the plan throughout the year to gain long-term benefits of tax planning.

  • Tax Planning with a Purpose (Purposive Tax Planning)
    When an assessee devises a tax saving plan with a purpose in mind, it is called purposive tax planning. Purposive planning involves prudence. You must select the right investment channels to obtain maximum benefits at minimum risk. You may also consider diversifying your income assets and business based on your residential status so that you gain the most tax relief.

  • Follow Income Tax Provisions for Tax Planning
    When tax planning is done following various provisions of the Indian tax laws, such as exemptions, deductions, contributions, and incentives, it is known as permissive tax planning. For example, when you chalk out your tax planning considering deductions allowed under Section 80C of the Income Tax Act, you are following a permissive tax planning.

How Can Individuals Save Taxes?
 

Tax Deductions Under Section 80C

Section 80C of the Income Tax Act is by far the most popular tax-saving option in India. As per Section 80C, making investments in Public Provident Funds, ELSS schemes, Five Year Bank Deposits, and National Savings Certificate will allow you a tax deduction of up to ₹1.5 lakhs per year. Section 80C also allows a deduction on the principal paid for home loans.
 

Tax Deductions Under Section 80D

Section 80D allows deduction on premiums paid for health insurance. You can claim a maximum tax deduction of up to ₹25,000 for paying medical insurance premiums for yourself, your spouse, and your children.
 

You are eligible for another ₹25,000 deduction if you pay medical insurance for your parents, and if the parents are above 60 years, you can claim up to ₹50,000 in tax deduction.
 

Now, if you and your parents are all above 60 years, the maximum claim limit for paying health insurance for both would be ₹50,000 + ₹50,000 = ₹1,00,000 per year.
 

Tax Saving Options Under 80E

Section 80E of the IT Act allows tax deductions on the interest paid for an education loan. You can claim a tax deduction on an education loan for yourself, your spouse, and your children.
 

You can claim the deduction for eight years starting from the repayment date. Remember, only the interest part is tax deductible, not the principle.
 

Claim Tax Benefits Under Section 24B, 80EEA

Indians have a knack for investing in real estate, particularly in residential properties. And if you also harbour such a desire, you will be glad to know that you can claim tax benefits under Section 80C, 80EEA and 24B on your home loan EMIs.
 

You are eligible for a standard deduction of ₹1,50,000 annually under section 80EEA for the interest paid on your home loan. The condition is that the property value should not exceed ₹45 lakhs, and you should be a first-time home buyer.
 

Section 24B, on the other hand, allows a deduction of ₹2,00,000 on the interest part of a home loan. The condition is that the construction of the house should be completed within 5 years from the end of the financial year in which you have taken the loan.
 

Tax Deductions under Section 80G and 80GGA

If an individual contributes to selected relief funds, Section 80G of the Indian Income Tax Act allows a tax deduction. Any resident and non-resident Indian taxpayer, HUF, firms, and companies can avail of tax relief under section 80G.
 

There are different types of funds or charitable contributions that offer a 100% tax deduction on the amount. For example, the National Defence Fund set up by the Central Government, the Prime Minister’s National Relief Fund, the State government set up funds for medical relief to the poor, the Africa (Public Contributions – India) Fund and many other funds offer 100% tax deductions. There are other funds that offer a 50% deduction and a 10% deduction.
 

Section 80GGA allows deduction on donations made towards scientific research or rural development. However, businesses and professionals cannot make contributions under section 80GGA.
 

Donations made to political parties are tax deductible under sections 80GGB and 80GGC.
 

Claim HRA Exemption

If you are staying in a rented home, you can claim tax exemption on your HRA, but you have to furnish the rent receipts obtained from the landlord. The HRA exemption limit depends on the city of residence.

How Can Self-Employed People and Business Owners Save Taxes?

Take a look at some popular ways to save taxes:
 

Deductions under 139(3)

Self-employed individuals can take benefits of the traditional deductions like salaried individuals, e.g., 80C, 80D, etc. However, Section 139(3) is exclusively applicable to self-employed individuals and traders where they can file their losses. Now, it may be a bit confusing for some. Let us explain.

People who file ITR 2/3/4 can file their losses if their loss falls under "Capital Gains" or "Profits and Gains of Business and Profession." It allows them to carry forward their losses and set off against incomes or profits under the same head in the next AY. As a result, their total tax liability decreases.

Although Section 139(3) has many layers, here are some crucial points that are worth mentioning:
 

  • Under section 139(3),  you must submit your return before the deadline to be able to carry forward your losses. But you can file a loss under the "House Property" category, which can still be carried forward even if you submit your return after the deadline. Section 24 of the IT Act will protect you even if you have missed the deadline, and you can still claim a tax deduction on interest paid on a house loan.

  • If you fail to submit your ITR before the deadline, your losses incurred in the current assessment year cannot be carried forward. However, if you had filed last assessment year’s ITR on time, and if all the previous year's losses have not been covered so far, they can still be carried forward to the next assessment year.

  • You should know that an income in capital gains in the next year can offset the loss in capital gains in the current year. However, if your net result under any head other than ‘capital gains’ is a loss for an assessment year, these losses can be set off by incomes shown under any heads in that assessment year.

Note: Losses in ‘capital gains’ can only be set off by income in ‘capital gains.’
 

Presumptive Tax Scheme (44AD, 44ADA, 44AE)

Small businesses can choose presumptive taxation, where their net income is calculated on their net revenues. If you are running a business and all your transactions are digital, the revenue department will calculate your income at 6% of the total turnover. On the other hand, if you are maintaining offline transactions, your income will be considered at 8% of your total turnover.
 

This presumptive tax is allowed under Sections 44AD, 44ADA, and 44AE.
 

  • Section 44AD: Small businesses with a total turnover not exceeding ₹3,00,00,000 (with 95% digital receipts) can benefit from section 44AD. But companies that are making a business in hiring, plying, or leasing goods carriages can NOT claim presumptive tax benefits under Section 44AD. Also, if you are running an agency business or you are earning on a commission basis, you will not be covered under Section 44AD.

  • Section 44ADA: Medical and legal practitioners, accountancy firms, interior decorators, technical consultancy firms, engineers and architects running their own businesses, and all professions under CBBT can claim tax benefits under section 44ADA. The total revenue of the business shall not exceed ₹75,00,000 (with 95% digital receipts).

  • Section 44AE: Companies making a business in hiring, plying, or leasing goods carriages are covered under section 44AE.

Conclusion

As you can see, tax planning is a serious concern and may demand prudence. If done correctly, it can save much of your hard-earned money from taxation. Furthermore, channelling this corpus into the right investment options can create future wealth for you and your family.

Want to Keep More of Your Hard-Earned Money? Speak to out expert

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Why is tax planning important?

Tax planning can reduce your tax liability by carefully planning your investments and loans. It can not only save you money but also create long-term wealth.

Should I choose the old regime for tax filing or the new regime?

If you have been filing your taxes in the old regime and following tax planning, you need to evaluate your annual tax deduction.
 

If your annual tax deduction is less than ₹1.5 lakhs, the new tax regime will be beneficial for you. However, if it is more than ₹3.75 lakhs, you should stick to the old regime.

Now, if your yearly deduction is between ₹1.5 to ₹3.75 lakhs, your income will determine the most beneficial tax regime for you. Use online income tax calculators to calculate your tax liability under both regimes and choose the most appropriate one.

Disclaimers

  •  Insurance cover is available under the product.

  •  The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.

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