5 Tax Planning Steps

5 Tax Planning Steps You Need to Know

What is Tax Planning?

Tax planning is the financial planning to reduce one’s tax liability.  It involves optimally utilizing tax exemptions, rebates, and other sorts of deductions as much as possible.

It is different from tax evasion and tax planning has to be done carefully without misusing the tax provisions.

It includes taking up a few financial and business decisions to minimize the incidence of tax.

Why should we do the Tax Planning?

Tax planning gives us the benefit financially to an individual by reducing the tax burden.  Tax planning helps in planning and deciding how much tax you will be paying on your income for the financial year.

  • To reduce the tax liability

Tax planning reduces the tax liability on an individual.  It involves proper usage of the deductions available in the Income Tax Act.

Proper usage of these deductions along with their maximum allowances can help to reduce the maximum benefit from the tax burden.

  • Productive investment

Tax planning also involves the main act of investment in the correct place.  It involves channelizing the funds available from taxable sources to different ways of income-generating plans.

It gives a way for the optimal utilization of funds for productive causes.

  • Economic Growth

Proper taxes aid in the economical growth of the country.  It helps the government is focusing on the betterment of society.

Economic growth can be made by improvising the financial situation of the country.

  • Economic stability

Money from taxes is the main revenue for the country.  The money from taxpayers is devoted to the betterment of the country.

Proper tax planning helps in the healthy inflow of white money which results in the better progress of the economy.

  • Minimize litigation

To litigate is to resolve any sorts of disputes that includes the local, federal, state or any foreign tax authorities.

There is always a disturbance between the taxpayers and the tax collectors because the government always want to collect as much as taxes possible, but the taxpayer wishes to pay minimal tax possible.

Types of Tax Planning

  • Short-range tax planning

Tax planning under this method is planned and executed at the end of a fiscal year.  It is an attempt to search for ways to limit the tax liability legally when the financial year ends.

  • Long-term tax planning

This plan is made at the beginning of the fiscal year and the taxpayer should follow this plan throughout the year.

  • Permissive tax planning

It involves tax planning under various provisions of the Indian taxation laws.  In India, tax planning involves various provisions like deductions, exemptions, and various other incentives.

  • Purposive Tax planning

Tax planning under this method involves using various instruments for saving tax with a particular purpose.

Tax Planning Steps

Calculation of the Gross Total Income

Firstly, compute your gross total income combining all the incomes you earned in a particular financial year.

It involves incomes from all the heads including the income from salaries, income from house property, profits and gains from business or profession, capital gains and income from other sources.

Compute the aggregate income after combining all your incomes only related to the particular financial year.

Getting maximum possible deductions

Try to get the maximum amount of deductions that are possible to claim from the investments made in the financial year.

These deductions help in reducing the tax burden on the income of the individual.  The maximum deductions you can claim depend on the maximum allowable amount by the provisions of the Income Tax Act.

The total taxable income

Compute the total taxable amount after deducting the eligible deductions from the gross total income.

After the eligible deductions are made, it gives out the taxable income which is used to compute the tax liability.

The total taxable income is used to compute the whole taxable income earned by the individual in a financial year.

Finding out other loopholes without evading the tax

After computing the total taxable income, check if there are any other ways you can use to reduce the taxable income without actually evading the income tax.

You can make use of many loopholes that are available in the act to choose the amount of deduction you wish to claim.

The tax payable

After arriving at the final taxable income, then comes the step to compute the payable tax amount.

The amount of tax payable is computed using the slab rates for the year. It also includes the amount of cess to be included in the total tax to be paid.

What are the Investment Options Available in Tax Planning?

The best way to plan your tax burden is to make investments that give out the best returns along with providing deductions under Income Tax.

The few investments you can make for this purpose are listed below:

Public Provident Fund

This is the most common and safest tax-saving method that provides a deduction under income tax computation and also gives an assured return.

Investments made in Public Provident Fund gives tax-free 8% per annual return without any risk involved, making it the best investment in your portfolio.

National Savings Certificate

The other small saving scheme is the National Savings Certificate.  Investments made in this can earn a taxable return at the rate of 8% per annum that is compounded on a half-yearly basis.

Equity Linked Savings Scheme

As meant by the name, it is an equity-linked tax saving product that suits investors who are willing to take exposure to the equity markets.

Investments made in this scheme are subject to a lock-in period of three years from the date you invest.

ULIP

ULIP means the Unit Linked Insurance Plan.  It is issued by the insurance companies as a product that offers the investors the benefit of investing both in equity and the debt market.

Insurance

It is also a good choice to invest in insurance plans be it life insurance, medical insurance, term or even endowment.

Investments in insurance give a deduction from tax under the Income Tax Act up to a particular limit of amount.

New Pension Scheme

New Pension Scheme sit he most recently brought among the instruments that are eligible for deductions under Section 80C of the Income Tax Act.

It is a good choice for after retirement financial planning that comes with the tax benefits.