Home Finance Tax Planning: Mistakes To Avoid To Get Hidden Deductions

Tax Planning: Mistakes To Avoid To Get Hidden Deductions

Tax planning is the process to avail maximum benefit of exemptions, deductions etc. from your tax liability to reduce the amount of tax burden on the assets you own.

Have you ever curious why your earnings are limited when you try to spend and save it that’s the tax liability force on you to pay it to the government.

Tax planning is under the boundary of law that government provided to you to get benefited but if you are not claiming these how can you think of your disposal income won’t decrease.

Tax planning is a component of personal finance, so you might have interested in other components.

Moreover You can read about personal finance.

Albert Einstein said,

“The hardest thing to understand in the world is the income tax.”

Pie chart of income and tax ration

What’s in it for you?

  1. Income tax planning and management
  2. Methods of tax planning
  3. Tax planning strategies
  4. Income tax planning in India
  5. Income tax investment plans
  6. Tax avoidance vs. Tax Evasion
  7. Conclusion
  8. FAQs

Income Tax Planning And Management:

Income tax planning and management is for individuals having income under the different slabs of income, hence they are liable to pay tax to govt. of India.

Moreover This will give an idea about how to reduce your tax liability by using some of the government regulated instruments and policies.

Tax Return

Objectives:

  • Understanding your sources of income
  • Best use of investment vehicles
  • Evaluating the steps for calculation of personal income tax liability
  • Learn certainly the difference between deductions and credits

Methods Of Tax Planning:

There are various methods so that we can use to reduce our tax liability;

Methods of tax planning

source

Tax planning strategies:

Firstly You can use a number of strategies for an effective tax planning for your annual income.

Further There are various techniques you should apply;

  1. Conversions
  2. Increasing deductible expenses
  3. Deferrals
  4. Tax planning for investments
  5. Timing of income and expenses

Conversions:

Firstly this strategy is the transfer of income from a high tax paying bracket to a low tax paying bracket member.

Let say if you are in the 30% tax slab, then you can transfer some of your asset income to the name of low tax paying member.

i.e. mother or wife having 10% tax slab; so that you can charge a low rate of tax on your income.

Increasing deductible expenses:

Firstly In this strategy you can spend your expenses on the services or goods which are regulated as deductible expenditure so that you can enjoy the goods and services and getting a deduction on your Tax liability too.

Isn’t it amazing, however most of the people follow this strategy.

Deferrals:

It means shifting some portion of your tax liability to some early or upcoming years but under provisions of the income tax act, 1961.

Ultimately you are paying same amount of tax but you are forwarding it to the different years so that you don’t have to pay it in lump sum.

Tax planning for investments:

This strategy belongs to your approach towards your investments in order to save tax from the return you are getting from the investment.

Meanwhile there are investments like long term investment in equity, health insurance are best investment that give you exemption to a certain extent you should consider.

Timing of income and expenses:   

Firstly you should know IT deptartment follow the financial year from 1st April to 31st march. So you can get the benefit by transferring some income to the next year to be taxable for that next year.

Moreover You can distribute your expenses on credit basis that will charge after 30-40 days after your purchase so that you will charge a tax not on the current year but surely in the next year.

Income tax planning in India:

Taxation provisions are issued in India in order to collect adequate amount of tax from the taxpayers for the development of infrastructure as well as the healthcare sector in states and all over Indian Territory.

Following is the Tax rate slab for different range of income category;

Income slabsGeneral categorySenior citizen(but age 60-80)Very senior citizen(but above age 80)
Up to Rs. 2,50,000NilNilNil
Rs. 2,50,000 to Rs. 3,00,0005%NilNil
From Rs. 3Lakh to Rs. 5Lakh5%5%Nil
Rs. 5Lakh to Rs. 10Lakh20%20%20%
Above Rs. 10Lakh30%30%30%

There is multiple numbers of tax options available by the IT dept. to general public of India as well as for the NRIs.

However there are some deductions and exemptions are mentioned in the section 80C to 80U for reduction of the tax burden in the Income tax Act, 1961.

In conclusion the sections are described for your better understanding;

SL no.SectionsRegulations
1  80C/80CCC/80CCDInvestment but in FD,NPS,PPF,ELSS,LIFE INSURANCE,SCSS,PENSION PLANS, HOME LOAN etc.
280CCD(1B)Investment but in NPS
324Interest paid on self occupied home loan
480EInterest paid but on education loan
580DMedical insurance premium certainly for self and parents
680GDonation but to approved charitable funds
780UPhysically disabled but dependent

Above all sections are may be subjected to change on yearly basis in every financial budget of our country. And that’s when one should consult a chartered accountant to know about newly applied guidelines.

Income Tax Investment Plans:

However to secure you and your family’s financial future you need to plan your investment as early in your career as possible.

So an organized investment plan can make you to save lot more than before in your investments.

However one should understand the scheme and investment plan offering then opt for that. Likewise process is done in every aspect of financial decisions in life.

Further here’s the brief explanation of different category of investments; that you can implement certainly starting of your career aging around 20-30

  • Get a term insurance policy certainly having a cover of 15 to 20 times of your annual income
  • Invest Public provident funds
  • Enroll but in Equity linked savings schemes
  • Buy but only Unit linked insurance plans
Tax refund

Moreover You should invest for post retirement policies; like

  • National pension scheme
  • Interest paid on house loan is exempted but up to Rs.2Lakh

Lastly if you are interested in children better future;

  • You can claim tax refund but on your children school fee paid
  • Invest certainly in health insurances for children

However to secure you and your family’s financial future you need to plan your investment as early in your career as possible.

Therefore an organized investment plan can make you to save lot more than before in your investments.

F.J. Raymond said;

“Next to being shot at and missed, nothing is quite as satisfying as an income tax refund.”

For instance if you are falling under highest tax paying bracket; then reduce your taxable income by transferring a sum of income to the non earning member of your family against specific assets like jewellery, house property etc.

Further Income transfer as investments in the name of your retired parents can be one of a way to reduce your taxable income.

Learn more

Tax Avoidance Vs Tax Evasion

Basis of comparisonTax avoidanceTax evasion
MeaningReduction of tax liability but under the provisions of Income tax Act,1961Intentional illegal reduction of income so that tax burden is minimum
ActivityUnder the law tax benefitTax benefit but fraudulence act
LegalityIn short It is legal.Certainly It is illegal
ExampleInvestments but under section 80C to 80UFaulty annual income, Overstating expenses, forging documents etc.

To sum up tax avoidance is the absolute solution one can opt for.But tax avoidance is the exploitation of the constitutional rules.

Hence it is certainly not a right choice to save taxes. However people are still doing it and we can see many frauds and scams exposed in recent years.

Conclusion

Lastly don’t hesitate around too much tax saving as it might a bit exhausting and the IT dept. may doubt your activities tax saving.

So you should know the difference between tax avoidance and tax evasion.

Moreover paying Tax is the duty towards our nation and we should follow it sincerely.

So a good citizen file his or her tax return every year.

FAQs

How to plan your income tax?

You can plan your income tax according to your tax slab you are falling under so that you can divide the income in various tax saving instruments.

Can I get term plan without income tax return?

No, but your income proof is required.

How can we plan income tax sections?

To clarify You can plan your investments based on the different provisions under different sections of 80C to 80D.

How income tax dept validates my health insurance plans?

However they verify the health insurance documents and contact with the policy providing company for the confirmation.

Why Income tax are paid?

In conclusion it is the income of the Govt. for the betterment of the country.

What is a financial year?

However a financial year starts from April 1st to march 31st of next year.

Why is a financial year is not a calendar year.

In calendar year all seasons aren’t included so the business people took a separate duration.

         

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