Everyone who earns an income in India is liable to pay taxes on it as per the Income Tax Act, 1961. Though no one likes to part away with their hard earned money but paying taxes is obligatory and as law abiding citizens we must pay our taxes.
What is Tax Planning?
Tax planning is the activity undertaken by a taxpayer who could be an individual, a business or an organisation to reduce the total tax liability by optimally utilising all the allowances, deductions, rebates, concessions and exclusions available well within the legal framework. Simply put, tax planning is the art of managing your income and taxes in an efficient manner so that you pay the least amount of tax on your total income.
However, one of the biggest problems in India while doing tax planning is that most of the taxpayers tend to restrict tax planning to just tax saving investments, but in reality tax planning is a much broader concept.
Tax planning is an important aspect of financial planning and a process which cannot be carried out as a one-time activity. As a taxpayer you should make use of all the tax exemptions, deductions and the benefits available to you to help you minimize your total tax liability and enhance your financial position. Efficient tax planning can help you achieve your financial goals if you explore all the possible tax saving options available to you and make the most of it.
How to plan your taxes?
Tax planning does not mean avoiding tax or investing in tax savings products only. It means building your portfolio through tax saving products by making the most of the power of compounding!
Step by step process to Plan your Taxes:
In order to plan your taxes, you need to first compute your gross taxable income.
Gross Taxable Income = Income from salary + Income from house property + Profits and gains from business & profession + Long term and short term Capital Gains + Income from other sources.
Then calculate the Net Taxable Income after deducting the tax saving deductibles.
Then calculate your tax liability from your Net Taxable Income from the current tax slab of 2019-20.
|General Category||Senior Citizen||Very Senior Citizen|
|Till Rs 2,50,000||NIL|
|Rs 2,50,001 to Rs 3,00,000||5%||NIL|
|Rs 3,00,001 to Rs 5,00,000||5%||NIL|
|Rs 5,00,001 to Rs 10,00,000||20%|
|More than Rs 10,00,001||30%|
In the FY 2019-20, it has been proposed in the Interim Budget that a resident individuals having an income of INR 5 lakhs or less, after Section 80 deductions, will get a FULL rebate on Income Tax payable upto INR 12,500 under section 87A.
However, there would be no impact for individuals having an income more than INR 5 lakhs per annum, after Section 80 Deductions.
What are the Tax Saving deductibles?
Here are some of the things you should consider in your tax planning which can help you lower your tax liability within the legitimate framework.
Step 1: Making the most by investing in tax saving investments under Section 80C, 80CCC and 80CCD
One of the most important components of tax planning is availing the investment benefits under Sec 80C of the income Tax Act. There is a huge list of financial investments for all types to investors to choose from. Some of the best investment options under Section 80C include
- Equity Linked Savings Scheme
- Pension Plans
- Tax saving Fixed Deposits
- Life insurance policy
- Contributions made towards Employee Provident Funds
- National Savings Certificate, etc.
- Home Loan
Investments made in one or more of these financial avenues is exempt from taxation up to the limit of Rs. 1,50,000. Since most people are aware of this aspect of tax planning, it is usually taken into account. But, you need to look beyond 80C.
- Salaried: Since most salaried people get Provident Fund as a part of their CTC, the contribution made by the employee towards the same gets accounted for 80C. Hence, salaried people have a lesser worry to fulfil their Rs. 1.5 lakhs U/S 80C for their tax saving investments.
- School Tuition Fees: In case you are unable to invest Rs 1.5 lakhs in any of the 80C investment products, you can also include the tuition fees paid for that year upto Rs 1.5 lakhs for two children. However, it is not advisable because in that case, you are not building up your investment portfolio but just saving taxes.
Step 2: Investments in NPS (National Pension Scheme)
The National Pension Scheme, managed by the Pension Fund Regulatory and Development Authority (PFRDA) is a generic pension scheme for all such that you have an option of investing in both equity and debt while building your retirement corpus according to your current age. This also provides as additional tax benefit of Rs 50,000 per year, over and above the Rs 1.5 lakhs of 80C limit.
Investments made specifically in NPS enjoy an additional deduction of Rs 50,000 under Section 80 CCD(1b) and in such case the total deductible limit is Rs 2,00,000.
Step 3: Tax Deductions for your Housing Loan
Repayment made towards the principal amount of your housing loan can be claimed as deduction under Section 80C upto the maximum permissible limit i.e. Rs 1,50,000. Additionally, you can claim a deduction of Rs. 2 lakh on the interest component as well under Section 24(b).
So, if at all, you are looking to pre-pay your housing loan then avoid paying the entire amount as your housing loan is critical in your tax planning and can help lower your taxable income considerably as payments made towards both principal and interest payment help in lowering your tax liability.
Step 4: Through your medical insurance policy premium
Given the rising healthcare costs it is extremely important to have medical insurance. Premium paid towards medical insurance policies take for self and family are allowed as deductions. The maximum deduction allowed under this section is Rs 1,00,000 subject to various sub-limits.
|Coverage for||Exemption Limit||Preventive Health Check-up Limit||Total 80D Deduction available|
|Self (with spouse and kids)||Rs 25,000||Rs 5000||Rs 25,000|
|Self (with spouse and kids) + dependant parents||Rs 25,000 + Rs 25,000 for parents||Rs 5000||Rs 50,000|
|Self (with spouse and kids) + dependant parents > 60 years of age||Rs 25,000 + Rs 50,000 for parents||Rs 5000||Rs 75,000|
|Self (with spouse and kids)> 60 years + dependant parents > 60 years of age||Rs 50,000 + Rs 50,000 for parents||Rs 5000||Rs 1,00,000|
Even if you are less than 60 years with senior citizen parents, you can maximise your tax deductions by paying a higher premium, which in turn would provide you with a higher sum insured.
Step 5: Through your Education Loan under Section 80E
If you take an educational loan for yourself, spouse or children then under Section 80E the interest paid on such education loan is exempt from tax and can be claimed as deduction. There is no maximum limit on the amount that can be claimed as deduction. However, the deduction is only for the interest component and not the principal.
Step 6: Through deduction under RGESS
For taxpayers with an annual income of less than 12 lakhs, they can claim a deduction under Section 80CCG for investments made in specific shares and mutual funds.
Expert Tip: However, this deduction is only allowed for investors who are investing for the first time and existing investors cannot claim this deduction.
Step 7: Other Tax Saving Avenues:
- a) Through donations made to charitable organisations:
Claim deductions for donations made by you to charitable trusts or relief funds. You can claim deductions on the amount donated by you provided such donations are made in cash/cheque and not kind.
- b) Interest Income under Section 80TTA
Interest income upto Rs 10,000 for interest earned on your savings account is exempt from tax under Section 80TTA.
Step 8: By setting off Capital Gains
You are liable to pay capital gains tax on the capital gains made by you from your investments. However, the Income Tax Department also allows you to carry forward your capital losses for a period of 8 consecutive years. Such losses can be set off against the capital gains made by you. However, long-term capital losses can only be set off against long-term capital gains.
Step 9: Investing the long-term capital gains from sale of property
You will be liable to pay taxes for any long-term capital gains arising from the sale of property. However, if you invest such gains in specific instruments like another property from the sale proceeds or 54EC Bonds then you will be able to claim an exemption on your capital gain.
Step 10: Other than these, there are some other aspects that can be worked upon for:
- A) For Salaried Employees: By Restructuring your Salary
A higher CTC package does not always tantamount to a higher net take home salary. How your salary is structured can play an important role in tax planning. Salaried employees should make use of the various deductions and exemptions available under the Income Tax Act, in order to make their salary more tax efficient. Though under the new budget the government has taken away the deductions for medical reimbursement and travel allowance and introduced a standard deduction of Rs 40,000 per year there are still many things you can do to make your salary more tax efficient such as:
- Ask for employer’s to make contribution towards NPS: Under section 80CCD(2d), contributions upto 10% of the basic pay made by the employer towards NPS fund is exempt from tax.
- House rent allowance (HRA): If you stay in a rented apartment, you can claim HRA buy submitting a copy of rent agreement and the rent receipt. The amount exempt from tax is lower of
- Actual HRA received
- 50% of basic pay (40% in case of a non metro) or
- Actual rent paid – 10% of basic salary.
- Include food meal coupons as Rs 50 per meal upto 2 meals per day is tax exempt for total number of working days in the company.
- Include telephone reimbursements as expenses for phone bills and internet connection can be claimed against actual.
- Include expenses for newspaper and periodicals as the same can be claimed against actual expense incurred.
- Include leave travel allowance as employees can claim LTA once in every 2 years in a block of 4 years.
- B) For business people:
(i) Distribution of profits amongst the partners
All the partners can saves on taxes by distributing the profits of the partnership firms amongst themselves. As the partnership firm already pays taxes so the profit which is distributed will not be taxed in the hands of the partner.
(ii) Claim deductions for travel and hotel expenses
As a businessman you can claim expenses for the amount spent by you on travel for business purposes. Such expenses made from one’s own pocket can be shown as expenses incurred on business and claimed for deduction from the income.
(iii) Expenses incurred on food
A businessman meets a large number of people such as vendors, customers, associates, etc. for carrying out his business. Expenses incurred on food and outings on such meetings can be claimed as a deduction from the income.
The purpose of tax planning is to ensure that you are able to minimize your tax liability and make productive investments to meet your financial goals and at the same time claim deductions and exemptions without making any tax evasion. Tax evasion and tax planning are two very things and as a taxpayer you must ensure that whatever you do to save on taxes should be legitimate so as to avoid paying any penal charges later.