What is Tax Planning and How to Save Tax?


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Tax Planning

Introduction

Tax is a taboo not for one but for all.

In common, paying tax aches in the heart of some. But the joy in the pain is that when you pay taxes, you get to receive improved facilities in society. What you pay today enables the society at large to witness in the form of development. If paying tax takes us to a brighter side, why do individuals worry when they face deductions.  Tax deductions strike because watching the income drain is a bit irksome. Thinking about this fact,the Government of India introduced the Income Tax Act which helped people in tax planning.

Individuals can now save tax and earn returns with the best tax saving investments schemes in India. The suitable time to think of tax planning is the beginning of the financial year. It will enable you to think about how you can work best to save taxes and earn returns through tax saving instruments. Let us explore in detail what is tax and what is tax planning?

What is Tax?

Taxes are contributions made by the individuals, mandatorily as imposed by the Government of India whether local or national. The taxes are collected to fund public services and support the operation of the government. Some of the common types of taxes that you pay to the country’s government are:

  • Income Tax
  • Sales Tax
  • GST
  • Corporate Tax.
  • Tariff

Well, talking of the tax planning and tax savings you will get to read here more on saving income tax. 

Further let us find out about tax planning.

What is Tax Planning?

Majority of the population aim to save income tax but only a few succeed. One issue about people failing to save tax is incomplete information and unawareness. Let us read about tax planning:

Tax planning is the process of reducing tax liabilities and working tax exemption, tax rebates, and benefits as much as possible. After planning tax you are better able to support some business or financial decisions.

Tax planning saves the taxpayer the amount by arranging the financial operations according to tax decisions. With proper tax planning, the returns can be directed into investments which is the correct way to introduce money back into the economy. In short we can say that tax planning is to:

  • Reduce tax liability.
  • Contribute to the growth of the economy.
  • Economic Stability.
  • Productive Investment.
  • Minimize law implications.

If saving tax is to maximise returns and contribute to an individual’s growth, let us see the ways on how to save tax.

How to Save Tax?

When talking of saving tax, the idea is to not run away from paying the taxes. But the intent is to invest in the most suitable tax saving instruments that maximise benefits for you.

Here are the instruments you can use to save tax:

Instrument

Lock-in Period

Return

Tax Exemption

Insurance Plans like Term Plan, ULIPs, Savings Plan, Child Plan

Ulip has 5 years Lock-in

Market-Oriented

Rs.1.5 lakhs on premium.

Public Provident Fund (PPF)

15

Fixed (depends on the rates set by the government)

Rs.1.5 lakhs on principal.

Equity-Linked Security Scheme (ELSS)

3

Market-Oriented

Rs.1.5 lakhs on principal

National Pension Scheme

Can be drawn when the individual attains age 60 years

Fixed (depends on the rates set by the government)

Rs.1.5 lakhs on principal.

National Savings Certificate

5 or 10 years

Fixed (depends on the rates set by the government)

Rs.1.5 lakhs on principal.

Health Insurance Plans

NA

Medical Reimbursements and Cashless Treatments

Depends on the individuals covered. Information later in the article.

1.Buy Tax Saving Insurance Plans

  • Life insurance policies have always been a preferred choice as tax savings insurance plans. Though buying a life insurance policy depends on the requirements, the major purpose it helps to solve is tax exemption. 
  • Tax saving life insurance plans provide you a tax benefit under Section 80C and Section 10(10D) of Income Tax Act, 1961. The maximum premium paid that gives you a tax exemption benefit is Rs.1.5 lakhs only.
  • Under Section 10(10D), the income on maturity is tax-free. Some of the life insurance policies that you can choose are:
  1. Term plan, the best one out there ! 
  2. Savings plan, 
  3. ULIP plan (life cover and investment), 
  4. Retirement plan
  5. Child plan.

2. Public Provident Fund (PPF):

  • Public Provident Fund is another popular scheme to save tax for the taxpayers in India. The account of PPF can be opened with a bank or a post office.
  • PPF attracts major attention of individuals because it falls under the category of exempt exempt exempt 
  • With a PPF account, individuals can claim a deduction for the amount invested in the year. The deduction can be claimed under Section 80C of Income Tax Act, 1961. Maximum amount that is eligible for deductions is Rs.1.5 lakhs.
  • The interest earned and the maturity proceeds under PPF are also exempted from tax liabilities.
  • Public Provident Funds have a lock-in period of 15 years and it allows the investors to either have withdrawal from the proceeds or continue for another 5 years.

3. ELSS Mutual Funds:

  • Another tax saving investment tool can be ELSS Mutual Funds. Equity Linked Savings Scheme is popular because of its feature of the shortest lock-in period.
  •  You can invest in ELSS to claim tax deductions from gross total income of up to Rs.1.5 lakhs under Section 80 C of Income Tax Act, 1961. 
  • Individuals who look for higher returns prefer to invest in ELSS. These are equity-oriented mutual funds that have higher risks and volatility attached to it. The returns on ELSS are linked to market-based performances. 
  • The investment in ELSS Is far more comfortable because the money you want to invest can be paid either in lump sum or via a monthly systematic investment plan (SIP). 
  • The investors of ELSS mutual funds have the option to make a choice between Growth Options, Dividend Options, and Dividend Reinvestment Option.
  • ELSS mutual fund schemes come with the shortest lock-in period of three years from the date of investment. Once this lock-in period is over, the redemption starts on First-In-First-Out (FIFO) Method.
  • While investing in ELSS Mutual Funds, you will attract the tax exemption. But once the lock-in period is over, the redemption or switch-out will attract tax liability.

4. National Pension Scheme:

  • The National Pension Scheme(NPS) is a scheme introduced by the government for protection in old age. 
  • Any individual who is a citizen of India and falls in the age bracket of 18-65 years can join the National Pension Scheme.
  • National Pension Scheme requires the individuals to have Permanent Retirement Account Number allotted at the time of registration.
  • NPS is regulated by the Pension Fund Regulator under the Ministry of Finance, Government of India.
  • The best part with this tax saving instrument is that it is a voluntary scheme for all citizens of India. It implies that individuals can invest anytime and in their NPS account and at any time.
  • The National Pension Scheme is one of the most cost-effective products available online.
  • NPS offers triple tax benefits as individuals can claim tax exemption up to Rs. 50,000 under Section 80CCD(1B). This benefit is over and above the tax exemption of Rs.1.5 lakhs claimed under Section 80C.Individuals can also invest up to 10% of your basic salary along with dearness allowance and claim tax exemption on invested amount under Section 80CCD(1).

5. National Savings Certificate

  • National Savings Certificate is a fixed income investment scheme which helps the investors to earn quite handsome returns.These are low risk investments tools that are secured as Provident Funds.
  • When you invest in National Savings Certificates, you can claim deductions up to Rs.1.5 lakhs under Section 80C of Income Tax Act, 1961.
  • National Savings Certificates provide complete protection and guaranteed interest to the investors. The guaranteed rate of return on National Savings Certificates is 6.8%.
  • Investors can put as low as Rs.1000/- and increase the amount as per their convenience.
  • An early exit from the National Savings Certificate is not available.
  • The investors can claim tax benefit under Section 80C upto Rs.1.5 lakhs.

6. Fixed Deposits(FDs)

  • Fixed Deposits are considered one of the safest tax saving investments tools.
  • The instruments involve less risk. The interest rate on the fixed deposits is decided by the bank.
  • Fixed deposits often have a minimum lock-in period of 5 years.
  • Senior citizens can get a higher rate of returns on their investments. 
  • The  investment on fixed deposit is eligible for deduction under Section 80C.

7. Health Insurance Plans.

  • Rising costs of medical facilities in India have forced people to buy health insurance plans to recover expenses made after hospitalization.
  • It is one of the safest options which provides you tax benefit as well as the option to avail medical facilities. Health Insurance pays you for the treatment of illness, diseases or accidental injuries only if the hospitalization of 24 hours is completed.
  • Health insurance policies for which you want to claim deductions can cover yourself, spouse or children.  The maximum tax benefit that can be claimed under Section 80D of Income Tax Act, 1961.
Individuals CoveredTax Exemption Limit
Self and FamilyRs.25,000 
Self, Family and Parents(if the age is less than 60 years)Rs.25,000
Self, Family and Parents(if the age is more than 60 years)Rs.50,000
Self, Family and Parents (if everyone is above 60 years)Rs.1,00,000

Conclusion:

These are the options that can help you in tax planning. You can choose any of the above considering the requirements that the tax saving investments tool will serve. Remember to plan tax in advance to avoid last minute hassles. Find the best way to optimize taxes and avail the tax exemption limit.

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Nirmalya Ghosh
Nirmalya has done his post graduate in business administration and now working as digital marketing executive in a US based firm. He loves to share the trending news and incidents with his readers. Follow him in Facebook or Twitter.