Timely tax planning brings a monumental difference in tax money going into the government’s wallet. Tax planning is not only for big-shot businesses but also for retail businesses and salaried individuals to reduce taxes. Every penny saved is a penny earned.
How is Tax Planned?
Using financial strategies to minimise or delay the tax, with the help of legal provisions, is referred to as ‘tax planning.’ Planning leads to maximising tax credits and deductions for the benefit of the taxpayers. Tax planning is another way of streamlining finances for achieving long and short-term goals. When tax amounts are eliminated or cut down to a considerable limit, the wealth gets preserved.
Importance of Tax Planning
After understanding the basic concept of tax planning, let us know its importance:
Reduction of Tax Amount
Be a businessman or a salaried individual; planning reduces the tax amount. The saved amount can bring respite during significant life events or can be used for further wealth creation. Various sections under the income tax act enable you to save tax. Some of the most important ones are:
- Section 80 C: It allows taxpayers to reduce their taxable income by up to ₹1.5 lakhs in a financial year. This includes investments in ELSS mutual funds, tax-saving FDs, PPF, EPF, life insurance premiums, etc. Apart from this, it also includes payments made towards a home loan.
- Section 24D: Interest paid on home loans up to ₹2 lakhs in a financial year can be deduced from the total taxable income.
- Section 80G: Donations made to government-recognised charitable organisations can be deduced from the taxable income.
Managing Time and Situations
Planning of taxes gives a stronghold in managing fiscal time and situations. Taking last-minute decisions will miss your chance to study your investments and tweak the portfolios for saving tax amounts. Doing tax planning in advance helps you prepare better and make the right decisions.
Benefitting from Rules and Provisions
The government keeps on introducing changes in tax rules and provisions. Keeping a vigilant eye on tax regulations is a part of tax planning and helps derive the best out of the minor or major changes. Close and constant scrutiny of changes in tax laws helps manage payable taxes and brings substantial benefits in the longer run.
Complying to Deadlines
Planning of taxes, well ahead of the deadlines, helps deal with last-minute contingencies. All the documentation can be done appropriately and accurately, with no scope of non-compliance.
Tapping Long Term Investments
Those having strong financial acumen keep a vigilant eye on long-term investments. This also makes them astute planners of their personal and professional taxes. They handle their current wealth to make it tax efficient. The tax planning makes their current investments compliant with the Income Tax Act, 1961 to further align future investments.
Minimising Tax Disputes & Litigations
Tax planning keeps disputes and litigations at bay. There is timely fulfilment of tax liabilities at the local and state levels. With minimum clashes or lawsuits, the taxpayers earn their peace of mind and avoid unnecessary penalties.
Leveraging Financial Productivity
Another core objective of tax planning is directing funds from taxable avenues to other income-generating instruments for optimal utilisation of money. For instance, investing in avenues covered under Section 80C such as ELSS funds or ULIP can potentially help you generate returns instead of paying taxes on the same.
The primary objective of tax planning is to save more from the income that can be invested, saved, or spent. Know the importance of planning your income tax and maximise your annual tax savings.