Tax planning for 2025: Tax planning is an essential exercise in your financial journey for evaluating your situation and identifying ways to reduce your net taxable income and overall tax payments by utilising provisions outlined in the Income Tax Act, 1961. It is crucial to regularly review your tax planning strategy as the government frequently introduces changes to the income tax rules, particularly during Union Budget announcements.
Effective tax planning not only allows you to optimse your tax payments but also helps you achieve both short-term and long-term financial goals. It is important to note that tax planning should be an ongoing activity, as it is necessary as long as your income remains consistent and taxable.
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Tax Planning can help you:
Minimisation of Tax Obligations: The primary goal of tax planning is reducing the amount of tax owed by utilizing deductions and credits effectively.
Increase in Savings and Investments: By decreasing tax burdens, individuals can allocate more resources towards saving and investing.
Achievement of Long-Term Financial Plans: Strategic tax planning plays a key role in reaching future financial goals, like retirement or purchasing a property.
Compliance and Penalty Prevention: Proper tax planning ensures adherence to legal requirements, helping individuals avoid penalties and fines.
Five essential tax planning actions that one should consider:
Tax Harvesting
In tax harvesting, investors strategically sell securities at a loss to offset taxable gains. By booking long-term capital gains (LTCG) of up to Rs 1.25 lakh annually, investors can benefit from tax-free gains under Section 112A of the Income Tax Act, 1961. Moreover, any losses can be carried forward to offset future gains, helping to reduce overall tax liabilities without affecting the investment portfolio.
Retirement strategy
By investing in the National Pension System (NPS), one can maximise your savings and reduce your tax liability. Take advantage of additional deductions of up to Rs 50,000 under Section 80CCD(1B), on top of the existing Rs 1.5 lakh limit under Section 80C. Furthermore, contributions made by employers to the NPS are also eligible for deductions – up to 10% of the basic salary in the old regime and up to 14% in the new regime.
Donations
In addition to making a positive impact on society, donations can also provide tax benefits. Donations made to registered charities, such as Shri Ram Janmabhoomi Teerth Kshetr, under Section 80G of the Income Tax Act, 1961, can offer deductions of either 100% or 50%, depending on the organization. It is important to keep receipts and verify the charity’s eligibility for tax benefits.
Health Insurance
Health insurance serves as a safeguard against unforeseen medical costs and also provides tax benefits. Premiums paid for your own, your family’s, and your parents’ health insurance are eligible for deduction under Section 80D, up to ₹1,00,000. This tax advantage also extends to expenses for preventive health check-ups, up to Rs 5,000. In essence, it offers financial security along with tax-saving perks.
LTA (Leave Travel Allowance)
Travel not only brings joy but also presents an opportunity for tax savings. Employees can claim tax exemptions on domestic travel expenses for themselves and their family during approved leaves, as per Section 10(5) of the Income Tax Act, 1961. Proper documentation is crucial for utilizing this tax-saving benefit.
ITAT ruling
Tax planning experts believe that the process doesn’t have to be complicated or done last minute. By utilising techniques such as tax harvesting, disciplined savings habits, and strategic investment decisions, along with analyzing which tax system is advantageous for your situation, it becomes possible to minimize tax payments and enhance financial progress.
In a recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT), it was determined that taxpayers have the right to engage in lawful tax planning strategies. The tribunal allowed the offsetting of short-term capital losses (STCLs) from the sale of shares against long-term capital gains (LTCGs), resulting in a reduction of the taxpayer’s overall tax burden. This decision is seen as a positive development for investors in the stock market, who often encounter scrutiny over such set-off transactions during tax assessments.
Tax experts emphasize that the key takeaway from this ITAT ruling is the importance of distinguishing between acceptable tax planning practices and unlawful tax evasion. The case in question dated back to the 2015-16 financial year, involving the disallowance of a STCL amounting to Rs 9.1 crore from the sale of Mindtree shares. This loss was set off against an LTCG of Rs 16.8 crore arising from the sale of Avendus Capital shares.
During the assessment, the Income Tax (I-T) officer disallowed the Short Term Capital Loss (STCL) claim made by the taxpayer, reclassified it as Long Term Capital Gain (LTCG), and included it in the taxpayer’s income. The taxpayer successfully appealed to the commissioner (appeals), leading to the escalation of the matter to the Income Tax Appellate Tribunal (ITAT).
The tribunal, however, rejected the department’s appeal, stating that the taxpayer had not utilized any unfair methods to decrease their tax liability. As per tax laws, a capital loss occurs when shares are sold at a lower price than their purchase price. If shares are held for less than 12 months, the resulting loss is considered a short-term capital loss, which can be offset against any capital gain, whether short or long term.