A Beginner’s Guide To Tax Planning in india

Tax planning should be an integral part of your finances. It’s your loss if you don’t make use of the available deductions and exemptions to save on taxes. Paying taxes is a way of contributing to the nation’s development, but when the government is providing you with options to save taxes, it is only wise to do so.

What is Tax Planning?

Tax planning is the analysis of one’s financial situation from a tax efficiency point of view so as to plan one’s finances in the most optimized manner. Tax planning allows a taxpayer to make the best use of the various tax exemptions, deductions and benefits to minimize their tax liability over a financial year. Tax planning is a legal way of reducing income tax liabilities, however caution has to be maintained to ensure that the taxpayer isn’t knowingly indulging in tax evasion or tax avoidance.

Tax Saving Objectives:

The objectives of your tax planning should be the following:

 To plan taxes through these options, it is first necessary to understand these important tax terms:

Basic exemption limit

As a conscientious citizen, everyone has a responsibility to pay taxes regularly. However, not everyone is obliged to do so. You are required to pay taxes only when your income is taxable. How does one find out if one’s income is taxable or not, though? By knowing about the basic exemption limit.

A basic exemption limit is the minimum income limit above which your income becomes taxable. Simply put, if your income is below the basic exemption limit, you need not pay any taxes.

For instance, if the basic exemption limit is INR 2,50,000 for the current financial year and your annual income is below this amount, you are not required to pay any taxes.

Slab rates

Slab rates are different levels of income according to which your taxability is determined. According to the Income Tax Act, 1961, every taxpayer is divided into different income groups to determine the rates at which their income will be taxed. These groups are called tax slabs. Whenever your income increases or decreases, it could also bring a change in your tax slab and thereby in your tax liability. For instance, if you are an individual under the age of 60 and your annual income is above INR 5,00,000 but below INR 10,00,000, your income will be taxed at 20%. Individuals whose annual income is over INR 10,00,000 are taxed at 30%.

To legally reduce your tax liability, you can invest in tax-saving instruments and avail of tax benefits like deductions and exemptions available on them.

Deductions

A deduction is a kind of tax benefit which can be availed of to reduce taxable income. This deduction could be an income or an expenditure that you incur. This deduction is subtracted from your gross income, to calculate your taxable income and thereby your taxability.

Gross income: INR 5,00,000

(-) Deductions under section 80 C: INR 1,50,000

Taxable income: INR 3,50,000

As per your expenses and income, there could be many deductions you can avail of.

For instance, by investing in Tax Saving schemes like 5-year Bank Fixed Deposits, some post office schemes, Public Provident Funds, pension funds, Insurance, etc. you can avail of a total deduction of up to INR 1.50 lakh under Section 80C and reduce your tax liability.

While looking for instruments to invest, consider the options that can help you avail of different deductions. For example, you can claim a deduction on house rent paid under Section 80GG and on your Medical Insurance under Section 80D.
Tax exemptions

Tax exemptions are monetary exclusions that can reduce your taxability. These exemptions either provide you tax relief, reduce tax rates or ensure that tax is applicable only on certain portions of your income. For example, if you pay the rent of your house, you can avail of an exemption on your House Rent Allowance that is calculated as per your salary. While calculating your taxable income, a certain portion of your HRA gets exempted from the gross income.

Gross income and taxable income

Your gross income is the total income you have earned in a financial year. It is the sum total of all the income from the following income heads:

From this gross income, your deductions and exemptions are subtracted to calculate your taxable income. On this taxable income, you find your tax liability as per different slab rates.

How to Save Taxes?

The Income Tax Act, 1961, provides taxpayers with several options to reduce their tax payable. Various sections offer tax deductions, out of which Section 80C is the most popular. Amongst exemption, claiming house rent allowance (HRA) is the widely used exemption. The best way to save taxes is to lay out a financial plan as and when there is a revision in your salary and to stick to it. Also, it is essential that you make tax-saving investments in the first half of the financial year, so that you don’t make hasty investment decisions at the end of the year. Furthermore, it would help if you claimed all the exemptions and deductions you are eligible for. To do this, you should know and understand the various exemptions and deductions available.

Section 80C

Section 80C is the most popular section in the Income Tax Act, 1961. It provides provisions for taxpayers to save up to Rs 46,800 a year in taxes. Section 80C covers several tax-saving investment options, and investors can choose to invest in any of the options under Section 80C to avail the deduction of up to Rs 46,800 a year.

Cumulative investments in these options will provide deductions of up to Rs 1.5 lakh. You can also claim deductions towards your payments made towards children’s school tuition fee and home loan principal repayment under Section 80C.

Now, let’s see how Abhilash can save more tax under Section 80C. Abhilash is already making a compulsory EPF contribution of Rs 21,600. That means, he still has a provision to claim a deduction of Rs 1,28,400 by making investments under options covered under Section 80C. Considering that he fully utilises the Section 80C limit, his tax savings for the year would be:

Particulars	Income tax saved when 80C limit is not fully utilised	When 80C limit is fully utilised
Total deduction under Section 80C	Rs 1,50,000	Rs 1,50,000
Compulsory EPF contribution	Rs 21,600	Rs 21,600
Investments in Other Section 80C Options (ELSS, PPF, LIC Policies, and so on)	Nil	Rs 1,28,400
Income tax saved	Rs 6,740	Rs 46,800
Additional taxes saved after fully utilising Section 80C limit	Rs 40,060

Claiming HRA Exemption

Taxpayers staying in rented accommodation can avail exemption on the rent paid by them under HRA exemption. For this, they need to furnish the rent receipts issued by their landlord. The amount of exemption will be the least of the following: i) Total HRA received. ii) Total rent paid reduced by 10% of their basic salary. iii) 40% of the basic salary for taxpayers residing in non-metro cities and 50% of the basic salary for taxpayers living in metro cities.

Now, let’s see how Abhilash can avail HRA exemption. If he is paying a monthly rent of Rs 25,000, then his HRA exemption calculation is as follow:

Particulars	Amount
Total HRA received (Rs 25,000 x 12)	Rs 3,00,000
Total rent paid reduced by 10% of basic salary	Rs 2,40,000
50% of basic salary (he is living in a metro city)	Rs 3,00,000
HRA exemption	Rs 2,40,000
Tax benefit	Rs 74,880

Section 80D

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 Abhilash 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. Abhilash’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, Abhilash 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.

Section 80E

Those taxpayers having availed education loans can make use of the provisions of Section 80E to save on taxes. Taxpayers can claim deductions of the interest paid towards education for eight years, starting from the date of repayment. The loan should have been availed from a recognised bank or non-banking financial institution. There is no capping on the deductible amount. The entire amount paid as interest can be deducted from the taxable income.

Other Exemptions and Deductions

Apart from the deduction mentioned above and exemptions, there are several other ways to save on taxes. Donations made towards qualified organisations and charities are eligible for tax exemptions in the range of 50% to 100%. Donations made towards those charities covered under Section 80G are eligible for 100% deduction. The Prime Minister’s National Relief Fund, National Foundation for Communal Harmony, and National Defence Fund are some of the funds that allow 100% deduction.

In a nutshell

Knowing these tax terms can help you calculate your tax liability better and thereby save on your taxes. While looking at your investments and expenses look for instruments where you can take advantage of maximum tax benefits. For, example, instead of just depositing your money in Saving Bank Accounts, invest them in Bank Fixed Deposits or a Public Provident Funds to earn better interest rates as well as avail of deductions. Efficient tax planning can help you pay the least amount of taxes in addition to managing your finances better.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.