Tax & Investment Planning

What is Tax Planning?

Understanding what is tax planning is one of the most important aspect of financial planning. It is a practice where one analyzes his financial situation based on tax efficiency point of view so as to invest and utilize the resources optimally. Tax planning means reduction of tax liability by the way of exemptions, deductions and benefits. Tax planning in India allows a taxpayer to make the best use of the various tax exemptions, deductions and benefits to minimize his tax liability every financial year. As responsible citizens of the country, paying Income Tax on time, on your income is mandatory for the country to grow.

Objectives of tax planning?

Tax planning is a pivotal part of financial planning. Through effective tax planning all elements of the financial plan falls in place in the most efficient manner. This results in channelization of taxable income to different investment avenues thus relieving the individual of tax liability. The investment amount post lock-in can be utilized for fulfilling needs and act as the retirement corpus in most cases. All in all, the objective of tax planning is to reduce tax liability and attain economic stability.

Highlights of tax planning?

Tax planning is the process of analysing finances from a tax angle, with an aim to ensure maximum tax efficiency. Considerations concerning tax planning will include timing of income, timing of purchases, planning for expenditures, and size. Tax planning is vital for small as well as large businesses since it will be helpful for achieving business-related goals.

The steps of the tax planning process:

First take into account your total income. This is simply the starting point of the process and involves doing an honest and accurate calculation of your annual and monthly income.

See exactly how much of it is taxable. Your entire take-home pay is not taxable. Some parts of your salary, like allowances for house rent or travel, are not taxable. On the other hand, any profit you make from your investments could add to your taxable income. Thus, understanding your actual taxable income is a must.

Avail deductions to reduce your total taxable income. This can be done through structuring your salary and planning your investments right. For example, profits from a debt fund held for over three years is taxed at 20% after indexation. Interest from a fixed deposit, on the other hand, is taxed at the same rate as your income tax. So if you fall in the 30% bracket, debt funds may be a more tax-friendly option for you.

Lastly, invest some money in tax-saving instruments. For this, you will need to read up on Section 80 of the Income Tax Act. This mentions all tax-related rules. There are many investment options that are available for effective tax planning like Provident Public Fund (PPF), Equity Linked Saving Schemes (ELSS) or National Saving Certificates (NSC). Even your life insurance , health insurance and home loan payments can help you avail tax savings.