Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient. Tax planning should be an essential part of an individual investor's financial plan.
Section 80D provides taxpayers with tax deductions on the premium paid towards health insurance policies for self, parents, spouse, and children. The taxpayers are can claim the following amounts as deductions under Section 80D: i) Up to Rs 25,000 on the premium for health insurance availed for self, spouse, and children. ii) If your parents are covered under the insurance policy, then a maximum deduction of Rs 50,000 is allowed. iii) If either of your parents is a senior citizen, then the maximum deduction allowed is Rs 75,000.
Now, let’s see how Akash can utilise the provisions of Section 80D to save taxes. He buys a health policy for himself by paying a premium of Rs 20,000. He later decides to cover his parents as well under the policy. He spends an additional Rs 53,000 to do so. Akash’s father is aged 61 years. Hence, he can avail an additional deduction of up to Rs 50,000 towards the premium paid to cover his father. Thus, Akash can claim Rs 70,000 paid by him (Rs 20,000 for covering self and Rs 50,000 for covering parents, one of whom is a senior citizen) under Section 80D this year. He saves Rs 21,840 in taxes under this Section.
2. Tax planning is a process of analyzing one’s financial situation
logically with a view to reducing tax liability. Tax planning
involves planning your income in a legal manner so to avail
various exemptions and deductions.
For Eg: Under Section 80C, you can avail tax deduction if specific
investments are made for a specific period up to a limit of Rs 1,
50,000. The most popular methods for saving tax are investing
in PPF accounts, National Saving Certificate, Fixed Deposit,
Mutual Funds and Provident Funds.
Tax planning involves applying various advantageous provisions
which are legal and entitles the assesse to avail the benefit of
deductions, credits, concessions, rebates and exemptions.
Or we can say that, Tax planning is an art in which there is a logical
planning of one’s financial affairs in such a manner that benefits
the assesse with all the eligible provisions of the taxation law.
Tax planning is an honest approach of applying the provisions
which comes within the framework of taxation law.
3. First-time taxpayers must understand the
fundamental objectives of planning their
taxes. They are as under:
To reduce tax liability:
To minimise litigation:
To stabilise the economy of the country:
To leverage productivity and financial
growth:
4. There are the three types of tax planning:
Purposive tax planning: Planning taxes with a
particular objective in mind.
Permissive tax planning: Tax planning that is
under the framework of law.
Long range and Short range tax
planning: Planning done at the start and end
of a fiscal year respectively.
5. Permissive tax planning refers to the plans
which are permissible under various
provisions of the law, for example planning of
earning income covered by Section 10,
Section 10(1), planning of taking advantage
of various deductions, incentives for getting
benefit of different tax concessions etc. In
other words, it means planning made as per
provision of the taxation laws.
6. Taxpayers are provided with several options to reduce
their tax liabilities. Various sections of the Indian income
tax law offer tax deductions and exemptions, of
which, Section 80C is the most popular tax-saving avenue.
For e.g., Deposits in Public Provident Fund , Five Year Bank
Deposits, National Savings Certificate , Investment in ELSS
schemes.
The best and the most optimum way to save taxes is by
laying out a financial plan whenever there is a revision in
your income and sticking to it. Also, it is a good habit to
make tax-saving investments at the beginning of the year
rather than making hasty and often incorrect investment
decisions at the last moment. To do this, it is crucial to be
aware of all the exemptions and deductions available to
you.
7. Section 10(1) simply states that any agricultural income earned
by the person is exempted from income tax. Now, in order to
understand the full coverage of exemption provided to
agricultural income under section 10(1) of the Income Tax Act, it
is important to under the definition / coverage of the term
‘Agricultural Income’.
Section 2(1A) of the Income Tax Act defines the term
‘Agricultural Income’. As per the definition, the agricultural
income means as under –
1. The revenue earned in the form of rent or lease generated
from the land if –
a. The land is situated in India; and
b. The land is used for agricultural purpose.
2. The income derived from the land by agriculture
operations (such operations include both basic and subsequent
operations).
3. The income derived from the processing of the
agricultural produce so as to render it fit for the market or sale
of the agricultural produce.
4. The income derived from any building owned and
occupied in and around the agricultural land.
8. Section 80C, one of the most prevalent sections in
the Income Tax Act, 1961, provides provisions to
save up to Rs46,800 (assuming the highest slab of
income tax i.e. @30% plus education cess 4%) on tax
liabilities each year. One of the best tax-saving
avenues under Section 80C is investing in an equity-
linked savings scheme, more commonly known
as ELSS.
Such tax planning mutual funds offer the dual benefit
of potential capital appreciation and tax-saving.
Apart from ELSS funds, you can choose to invest in
government schemes such as National Savings
Certificate (NSC), Public Provident Funds (PPF), tax-
saving FDs, etc. Cumulative investments under these
securities can offer deductions up to Rs1.5 lakh.
9. Under this section, taxpayers are offered
deductions on the premium paid towards health
insurance policies. Under Section 80D, a taxpayer
can claim the following amounts as deductions:
Avail up to Rs25,000 on the premium paid
towards health insurance for self, children, or
spouse
Avail up to Rs50,000 if your parents are also
covered under your health insurance plan
If either of your parents belongs to the senior
citizen bracket, then a maximum deduction of
Rs75,000 is allowed
10. Section 80E offers tax deductions on the
interest paid for an education loan. These
deductions can be claimed for eight years
starting from the date of repayment. There is
no upper limit on the deductible amount.
This means that an assessee can claim the
entire amount paid as interest from the
taxable income.
11. Under HRA, taxpayers can avail exemption on the
cost incurred to stay in a rented accommodation.
The taxpayer is mandated to furnish the rent
receipts provided by the landlord. The deduction
available is the least of the following amounts:
Actual HRA received; or
50% of basic salary + DA (dearness allowance) for
taxpayers living in metro cities; & 40% of (basic
salary + DA) for taxpayers residing in non-metro
cities; or
Total rent paid less 10% of basic salary + DA
12. Apart from the deductions and the
exemptions mentioned above, you can save
taxes in several different ways. Donations
towards charities and qualified organisations
are also eligible for tax exemptions.
Under the new tax regime announced with
the Union Budget 2020, individuals can opt to
pay taxes at reduced rates and redefined
income tax slabs by forgoing the various
deductions and exemptions.
13. Tax planning is the analysis of a financial situation
or plan to ensure that all elements work together to allow
you to pay the lowest taxes possible. A plan that
minimizes how much you pay in taxes is referred to
as tax efficient. Tax planning should be an essential part
of an individual investor's financial plan.
Permissive Tax planning, if performed under the
framework defined by the respective authorities, is an
entirely legal and a smart decision. However, you might
land yourself in trouble for adopting shady techniques to
save taxes. It is the duty and responsibility of every citizen
to carry out prudent tax planning. Based on your tax slab,
personal choices, and social liabilities, you can choose
from distinct tax saver mutual funds and investment
avenues offered to you.
