What is 'Tax Planning'
Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency, with the elements of the financial plan working together in the most tax-efficient manner possible. Tax planning is an important part of a financial plan, as reducing tax liability and maximising eligibility to contribute towards the retirement plans as both are crucial for success.
How to save TAX
The Indian Income Tax Act allows certain deductions which can be claimed to save tax at the time of filing of income tax return. These deduction which helps in saving tax are only available if the taxpayer has done tax planning during the year.
The most popular was of Tax Planing which help a taxpayer to save tax legally are as follows:
Tax Saving under section 80C, Sector 80CCC, Section 80CCD:
The maximum combined deduction allowed under these 3 sections is Rs 1,50,000/-. The instruments specified by the government for the purpose of the Tax planning are as follows:
- PPF account
- 5 year tax saving fixed deposits
- Pension Plans
- ELSS ( Equity likened saving schemes)
- Contributory Employee Provident Fund.
- National Saving Certificates
- Life insurance policies.
- Repayment of Home loan principal amount. (Section 80C)
Tax Saving under section 80D, Sector 80DD, Section 80DDB:
The income tax allows for education to save tax if the expenditure has been made by the taxpayer for insuring his own health or the health of his relatives. Different amount of deduction are allowed under each of these section which help in tax saving.
- Section 80D: Medical Insurance Premium of self or spouse or children.
- Section 80DD: Medical Treatment of Handicapped Dependents.
- Section 80DDB: Treatment of Specified Diseases.
Tax Planning through Home Loan:
Income Tax Act allows to claim deduction for repayment of principal amount of home loan u/s 80C.
It also allows a deduction of interest paid on home loan under section 24. The maximum deduction allowed in some cases is Rs 2,00,000/-.
Save Tax through Eduction loan u/s 80E
If a tax payer has taken an education loan for the higher education of himself or spouse or children or the student of whom he is the legal guardian, he can claim deduction under section 80E. Such deduction is only allowed for the repayment of the interest and not the the repayment of the principal amount of eduction loan. There is no maximum limit for claiming deduction under section for the repayment of interest on eduction loan.
Tax Planning under section 80CCG: RGESS (Rajiv Gandhi Equity Saving Scheme)
A taxpayer having annual income of less than Rs. 12 lacs p.a. is allowed an additional deduction under section 80CCG for investing in shares of specified companies and specified Mutual Funds. It is exclusively for the first time retail investors in securities market. This Scheme would give tax benefits to new investors who invest up to Rs. 50,000 and whose annual income is below Rs. 12 lakh.
Tax Planning of Long Term Capital Gains.
If long term capital gain is arising to a taxpayer from the sale of any Long Term Capital Asset, he can claim exemption from paying such Capital Gain Tax if he invests the amount of gain from sale of property in specified instrument. Any asset is considered as Long Term Capital Asset if that asset was held by the taxpayer for more than 3 years.
Income Tax Deduction for Donation u/s 80G
If a taxpayer makes a donation for charity, social or philantrophic purpose or make a contribution towards National Relief Fund, then this donation can be claimed as a deduction u/s 80G of the Income Tax Act. In some cases, 100% of the donation made is allowed to be claimed as a deduction whereas in certain cases only 50% of the donation made is allowed to be claimed deduction for the purpose of saving tax.
(For deduction made through cash only Rs. 10,000/- would be allowed to be claimed as a deduction. For claiming deduction above Rs 10,000/- , the taxpayer would have to make the donation through cheque.)
Long Term Capital Gains from the Sale of Equity Shares and Equity Funds
To encourage the public to invest in equity shares and Mutual Funds, the government has exempted income tax on the long term gains arising from the sale of equity shares, provided that these shares were held for a period of more than 1 year. If the shares are held for a period which is less than 1 year, tax would be levied @ 15%.