As an Indian taxpayer, it’s imperative to file your Income Tax Returns (ITR) annually. The ITR encompasses details of your annual income and the corresponding tax payable to the government for that year. Individuals continually seek effective methods to minimize their tax liabilities. Through prudent tax planning, you can achieve substantial long-term savings. Smart tax planning not only allows you to maximize your income but also enables you to reach your financial objectives.
Tax planning involves the strategic and lawful management of one’s financial affairs aimed at minimising tax liability. This process includes leveraging various provisions and deductions provided by tax legislation to optimize one’s taxable burden while adhering strictly to legal parameters.
To put it plainly, tax planning is about managing your finances astutely in order to reduce taxes payable. It entails making informed decisions regarding expenditure, savings, and investments within the framework of existing regulations so as legally retain a larger portion of your earnings. Both individuals and businesses engage in this practice by adopting strategies that effectively mitigate their overall tax expenditures.
“Tax planning is essential for every taxpayer to minimize tax liability and optimize financial resources. Understanding available deductions and exemptions is crucial, as they can significantly reduce the tax burden. By utilising provisions like Section 80C for investments in tax-saving instruments such as ELSS, PPF, and FDs, taxpayers can maximize deductions and save on taxes. Additionally, exemptions like HRA and deductions for health insurance premiums under Section 80D provide further avenues for tax savings. It’s important to plan taxes in advance, make informed investment decisions, and leverage available tax-saving options to build a robust financial portfolio while minimising tax liabilities,” said Manikandan S. of ClearTax.
Business Today spoke to Manikandan S of ClearTax, who simplified the tax planning process. Here are a few crucial tips to save your money from 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 exemptions, 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.
Note: It is to be noted that if you opt for the new tax regime, limited deductions and exemptions are allowed.
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 to avail of the deduction of up to Rs 46,800 a year. The best tax-saving option under Section 80C is the equity-linked savings scheme (ELSS). It is an equity-oriented mutual fund scheme, offering the dual benefit of tax-saving and wealth growth.
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 can claim the following amounts as deductions under Section 80D: i) Up to Rs 25,000 on the premium for health insurance available for self, spouse, and children. ii) In case the Individual or any of his family members is a Senior citizen, then a maximum deduction of Rs 50,000 is allowed. iii) If either of your parents is a senior citizen, who is covered under mediclaim policy, the maximum deduction allowed is Rs 50,000.
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 for higher education. There is no capping on the deductible amount. The entire amount paid as interest can be deducted from the taxable income.
Section 80CCD(1B)
Section 80CCD(1B) provides an additional deduction of up to Rs 50,000 for contributions made to NPS. The additional deduction of Rs. 50,000/- under Section 80CCD(1B) is available over and above the benefit of Rs 1.50 lakh deduction under Section 80CCD(1).
Note: The aggregate amount of deduction under sections 80C, 80CCC, and 80CCD(1) is restricted to Rs. 1,50,000.
Section 80 EEB
Section 80EEB of the Income Tax Act allows you to claim tax savings of up to Rs 1.5 lakh on interest paid on a loan made specifically to purchase an electric vehicle. The loan should have been sanctioned by a bank or specified NBFC between 1 April 2019 and 31 March 2023.
Why to plan your outgoing taxes
Manikandan said effective tax planning serves as a strategic tool for both individuals and businesses to structure their finances in a manner that minimises tax liabilities while maximising after-tax income or profits.
This encompasses various decisions related to investments, expenditures, business organisation, and other financial aspects. The objective is to achieve optimal tax efficiency while ensuring full compliance with the prevailing tax regulations in India.
> Minimise Tax Liabilities and Maximize Savings
The main vector of tax planning is a legal reduction in tax assessments. Thanks to numerous deductions, exemptions, and credits, people and enterprises can save quite a lot of money yearly, and those who adhere to accurate tax planning can contribute their resources and savings to their well-being instead of the state.
> Optimise Investments and Financial Decisions
Tax planning is an essential part of an individual’s or business’s enabling investment decisions. Planning for taxes allows all parties to examine their investments and transactions’ tax implications. As a result, tax-efficient investment strategies may be implemented to help taxpayers reach their financial goals and see a higher return on investment.
> Tax Incentives and Deductions While Complying With Law
The Indian government offers numerous tax incentives and deductions to inspire precise activities and investmens. By accomplishing tax planning, people and businesses can discover and gain from those incentives deductions. This includes deductions for costs including domestic loans, clinical fees, education charges, charitable contributions, and greater. India has a complex tax system with diverse tax laws and policies. It may be tough for people and companies to navigate through the difficult tax panorama without right making plans. By undertaking tax making plans, taxpayers can ensure compliance with tax legal guidelines, keep away from consequences or legal issues, and keep a very good standing with the tax government.
> Manage Cash Flow Effectively
Tax planning lets individuals and businesses to balance their cash flow correctly. By aligning profits and expenses, taxpayers can ensure a clean float of budget throughout the year. This enables in averting cash drift crunches and ensures monetary stability.
> Achieve Long-Term Financial Goals
Tax saving plans are a fundamental part of Long-term financial planning. By thinking about the tax implications of diverse monetary selections, individuals and groups can align their techniques with their long-term goals. This consists of retirement plans, estate planning, succession planning, and other aspects of monetary management.
> Retirement planning
Retirement planning should be a part of every individual’s financial plan. It is essential to save enough to look after yourself and your dependents after you retire. Once you retire, your income stops. If you don’t have any savings or investments to fall back on, you will find it difficult to sustain. Therefore, it is prudent to proactively plan for retirement and consider investing in tax-saving schemes. The Income-tax Act, 1961 provides various deductions and exemptions specifically designed to incentivize retirement planning, such as the National Pension Scheme(NPS), Public Provident Fund (PPF), Senior Citizen’s Saving Scheme (SCSS), etc.
> Compliance Management and avoidance of penalties
Tax planning offers the dual benefit of ensuring compliance with tax laws while avoiding penalties. By proactively managing tax affairs, individuals and businesses can navigate complexities, minimize errors in tax reporting and reduce the risk of penalties and interest charges.