Tax Planning

 

Introduction to Tax Planning:

Tax Planning is an activity conducted by the tax payer to reduce the tax liable upon him/her by making maximum use of all available deductions, allowances, exclusions, etc. feasible under law. 

                                                                            

It is a good thing to give government a part of our earnings so that various development works can be carried out. But we should also think of saving the tax that we pay with the help of ways provided by the government. Various deductions that can be taken under Section 80 can be taken up to a maximum limit of 1.5 Lakhs.

How to create an effective Tax plan ?

Let us try to understand it with an example:

I would like to take deductions as follows:

1.        PPF (Under Section 80C): Invest Rs. 5000, in PPF every month, i.e., Rs.60,000 per annum into PPF. I will save tax also and fulfil my investment plan also.

2.        ELSS (Under Section 80C): An Equity Linked Savings Scheme, popularly known as ELSS, is a type of diversified equity scheme which is close-ended, with a lock-in period of three years, offered by mutual funds in India. Annual Investment of 68,500 to be made in ELSS, which will save tax expenses and generate income also.

3.        Deduction for Term Life Insurance: Deduction of at least Rs. 9492, based on the plan I chose. Premiums paid for it are deductible u/s 80C.

4.        Deduction for Medical Insurance (Under Section 80D): Take a health insurance of an annual premium of Rs. 21500 approx. for the cover of Rs. 75,00,000.

 

NET INCOME WITHOUT TAX PLANNING	AMOUNT (₹)
Annual Income	12,50,000
Income Tax @ 25%	312500
NET INCOME	9,37,500

 

 

NET INCOME AFTER TAX PLANNING	AMOUNT (₹)
Annual Income	12,50,000
Deductions Under Section 80C	1,50,000
Net Taxable Income	11,00,000
Income Tax @ 20%	220000
NET INCOME	8,80,000

 

Analysis of the above Tax Plan

As we can see above, without any taxation planning, we have to pay a tax of Rs. 3,12,500 p.a. under 25% slab of Income Tax. But after tax planning and making proper allocations of money, Income tax paid is Rs. 2,20,000. Hence, we save Rs. 92,500 p.a. This amount can further be invested into some return generating investments.

                                                Conclusion                     

                                                                                  

Thus, we should always try to plan our taxes in such a way that less of them have to be paid and more return can be made in long run.