As an honest citizen of the country, it is your duty to pay your taxes. However, every investor is looking to save as much tax as possible. This can be made possible through tax saving investments. The need of tax planning is absolutely necessary to save a substantial amount of your finances. This is because taxes can eat a big chunk of your total investment returns every year. Therefore, through proper tax planning, you can create a strategy that allows you to minimise your tax liability every year.
What is tax planning?
Tax planning is a process of analysing and evaluating an individual’s financial profile. The aim of this activity is to minimise the amount of taxes you pay on your personal income. In short, employing ways that the government has provided to save tax is a perfectly legal method to cut down your annual tax liability. There are a number of tax saving investments in India that are useful in saving money.
What constitutes tax planning
There are three key characteristics of tax planning—investing to reduce taxes; planning your finances in such a way that you attract the least amount of tax, and the process of tax filing. As a result, tax planning affects all aspects of your money matters.
Let’s understand this better:
Tax saving opportunities available for everyone
There is a whole range of income tax sections that allow you to legally benefit from tax-saving. A popular and easy avenue for taxpayers to avail tax deduction is to employ Section 80C of the Income Tax Act. Section 80C can allow you to claim a deduction of Rs 1.5 lakh on your taxable income.
However, there are a lot of other sections that can offer you huge tax benefits. Some of the provisions in the Income Tax Act are: Sections 80D, 80DD, 80EE, 80G and 24(b).
Not many people are not aware of all the tax-saving options available to them. For instance, did you know that under Section 80G, donations made to certain charitable organisations are eligible for tax deductions?
Taking tax-efficient decisions
There’s more to tax than investments. It affects every single aspect of your life—from salaries and income sources to expenditure to financial decisions. And this is a key aspect of tax planning—it helps you make decisions that lower your tax burden.
For example, let’s say you have to choose between two investment options. A tax planner helps you choose the best option while keeping in mind both returns as well as tax efficiency. Another example is ensuring your income is structured in the most tax-efficient way.
Tax audit and filing
The last key aspect of tax planning is the actual tax filing. This is when you take into account all aspects of your finance—income, expenses, debt, and investments—and then calculate your tax liability. Then, there’s all paperwork and documentation involved in paying your tax and filling your tax returns.
How IndiaNivesh can help
Our Wealth Management team is well equipped to help you plan your investments while keeping in mind the taxation aspects. This can help you grow your wealth and save tax at the same time. Click here to know more about our Wealth Management division.
As taxpayers, knowing and being aware of all kinds of taxes can help on planning the financial year well. This will not only help you save more money, you can also create a better financial plan for your family. That’s why it is very important to make sure you have a tax plan in mind whenever you plan to invest your money.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
Tax Planning & Management FAQs
1) Tax filing is not part of tax planning and management. True or false? a) True b) False Correct Answer: False. Tax filing is an important aspect of tax planning. This also helps you audit your finances for tax. 2) It’s better to plan taxes after investing a) True b) False Correct Answer: False. Always plan your taxes before you plan to invest. There are various methods of tax planning you can use. One of the things tax planning does is identifying the tax bracket you fall in. This can help you choose investments that are tax-efficient as per your IT slab rate. 3) The concept of tax planning involves deduction and exemption. What is the difference between tax deduction and exemption? a) Tax deduction is when you get tax-free income; tax exemption is when an expense helps you lower your taxable income. b) Tax deduction helps lower your taxable income; Tax exemption is when an income is tax-free and thus, not a part of your taxable income. Correct Answer: B. Tax deduction is when you make an investment or an expense that lowers your taxable income. An exemption—as the name suggests—is when something is not taxable to begin with. 4) Various types of tax planning and tax-saving investments help you… a) Build your retirement kitty b) Buy a house in the next 2 years Correct Answer: Tax-saving investments have lock-in periods of 3-15 years. This helps them compound returns and thus grow money in time for retirement. It may not help a short-term goal. 5) Tax planning in India means investing in options that get you a tax deduction of up to Rs 2 lakh a) True b) False Correct Answer: False. Tax planning also includes other aspects like reducing your taxable income, looking for tax-efficient investments, etc. 6) Which of the two Equity-based investments get you only tax exemptions, not deductions? a) National Pension Scheme b) Equity Funds Correct Answer: NPS. All Equity Funds don’t get you a tax deduction. Only ELSS—a type of Equity Fund avails tax deductions under Section 80C. NPS, meanwhile, helps you lower your taxable income. 7) Those in the lower income tax slabs feel dividends are more tax-efficient. a) True b) False Correct Answer: False. The DDT is over 28%. Such investors may find income sources that are taxed at their income tax slab rate of 5-20% or lower to be more tax efficient. 8) Members can receive a salary from the HUF. But this is taxable. a) True b) False Correct Answer: False. You can receive a salary as a member, but it is tax-free. 9) Can expenses get you an income tax exemption? a) Yes b) No Correct Answer: No. Income tax is generally levied on income—either through service, business or investments. You can only get tax deductions on expenses, not exemptions. 10) Which of the two is more tax-efficient at the final payout stage? a) Life insurance b) National Pension Scheme Correct Answer: Life insurance payouts are tax-free. Meanwhile, withdrawals from NPS funds are taxable as per your IT slab rate. FINAL SCORE: How did you score? 0-3: You may want to read through and understand the chapter on Tax Planning once again. Or, speak to one of our experts for better understanding. 3-6: You’ve half-way there on your goal towards minimal taxes. But continue the efforts to be great at tax planning. 6-9: Very good. Go back to the few wrong choices and read those chapters better. 10: Congratulations! You are ready to make a tax plan of your own. Run it past one of our Tax planners for better chances of success.Disclaimer:Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
Tax saving schemes with a purpose
Who does not want to save Rs 60,000 in taxes? That’s why everyone in the know makes a beeline for the various tax-saving investments that avail you a tax deduction of Rs 2 lakh. But they often make the mistake of buying tax saving schemes without much thought to other factors. After all, there is more meaning to them than just tax-saving. Income tax saving options are investments meant to earn returns and help you fulfil different dreams in life. The numbers can prove this to you. Have a look:Tax saving with a purposeLet’s say you invest Rs 1.5 lakh, your mandatory 80C tax-saving investments, on a monthly basis throughout the year. You then end up investing Rs 12,500 every month the whole year. Now, thanks to the power of compounding, this amount earns you returns every month. And with time, even the returns compound to expand your wealth. Pretty soon, the wealth your investment generates would dwarf the Rs 45,000 you saved in tax.Now this happens in two key phases. 1) Accumulation Phase: This is the pre-retirement phase wherein you invest Rs 12,500 per month for the entire earning period till the age of 60. This is how your investments grow over a span of 35 years (assuming you being at the age of 25) 2) Retirement Phase: Then comes the post-retirement period when you let the investments grow without redeeming the entire amount. You may not need any further contribution in this phase. All you need to do is redeem your investments partly--as and when needed for your regular monthly expenses. This way, your investments grow continuously for years together. In such a case, after another 20 years, your portfolio can grow further as below: Similarly, other goals can be fulfilled too. To fulfil major goals and associated expenses, you can simply withdraw from the investment corpus as and when needed. And if you choose the right tax-saving investment option, such redemptions have zero tax implications too. This applies to all kinds of goals, whether they are time-bound or not. For example:Child Higher Education: If your child needs say Rs 20 lakh by the time you turn 45 years of age (20 years after you first started investing), then all you need to do is redeem that amount while also continuing the investments. The entire focus of this plan is to continue the investments without a break! Alternately, you could choose an investment that gives you an annual payout like a Money-back insurance plan. You time the investment such that the payouts synchronise with your child’s fee payments, etc.Secondary source of income: Almost all the tax-saving investment options you have offer some kind of regular payment. This could be in the form of interest payments or dividend distributions. Over a period of time, when your corpus grows large, even a minuscule interest or dividend payout can amount to large sums. These can be tax-efficient modes of getting a secondary income. You can use these to fulfil other dreams like travelling, etc. The bottom lineConsider additional tax saving options other than 80c. Your tax saving investments options, if planned properly, can turn out to be a sweet spot in your investment portfolio. But remember, these investments need to be planned and chosen with great care. Only then can they help meet your long-term financial goals. At IndiaNivesh, the wealth management team can help you make such wise tax-saving decisions that also fulfil various life goals. Click here to know more.What next?We’ve spoken so much about tax planning and tax saving, what they are and how they benefit you. But let’s move to the key information—how to plan your taxes.DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Are you Investment ready?
*All fields are mandatory