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Tax Planning

Tax planning is an essential part of financial planning and involves analyzing our financial situation, identifying tax-saving opportunities, and implementing strategies to reduce our tax liability.



By minimizing our tax burden, we can increase our disposable income and allocate more resources toward achieving our financial goals.

Effective tax planning requires a thorough understanding of tax laws and regulations and an awareness of current and potential changes to the tax code.

 

A golden rule to follow in tax planning is “The key to smart tax planning is to keep it simple”. One doesn’t have to seek advice from multiple sources and get confused in the process. Plan everything well ahead in the year, instead of the last-minute tricks. We can take advantage of the various exemptions and deductions with simple methods to minimize our tax liability during a financial year.


“It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward”

Remember, it is vital to ascertain where we stand, in terms of our Gross Total Income and Net Taxable Income. By doing so we can create much effective tax plan. This in turn would deliver us the objective of long-term wealth creation along with capital protection.


How to save taxes in India with the help of Tax Planning?

  • Tax planning is about how wisely we invest in the right instruments to achieve our financial goals. 
  • The deductions are available from Sections 80C to 80U of the Income Tax Act, i.e. Chapter VIA and can be claimed by eligible taxpayers. 
  • Under this Individuals can claim tax deductions for certain expenses/payments made by an assessee, such as home loan interest, medical expenses, donations to charity, tuition fees, etc. 

What are Chapter VIA Deductions?

In an effort to motivate taxpayers to save and invest, the income tax department has provided various deductions under Chapter-VIA. These deductions are deductible from a taxpayer’s taxable income.

Note: One can avail of the deduction only under the old tax regime.

Deduction under Chapter VIA of Income Tax Act refers to a reduction in the taxable income of an individual or a business entity, which results in a lower tax liability of an assessee. The Income Tax Act provides for various deductions under different sections, which can be claimed by an individual or a business entity while calculating their taxable income,


List of deduction under Chapter VIA


 Deductions are not allowed from the following incomes: 


Which of the following income can be adjusted against the deductions provided in Chapter VIA

Long-term capital gains u/s 112A
Short-term capital gains u/s 111A
Short-term capital gains
Winnings from card games

Limitations of Tax Planning:

Tax planning comes with certain limitations. For the salaried class, the employers are responsible for correct deduction of tax. In the case of a business, the business owners are responsible for declaring the right and factual income. People with taxable income may hide income to avoid taxes, or claim excess expense claims and deductions to lower down the tax burden. In such cases, tax evasion/avoidance takes center stage.


Tax Avoidance: 

  • Tax avoidance is an act of using legal methods to minimize tax liability. In other words, it is an act of using tax regime in a single territory for one’s personal benefits to decrease one’s tax burden. 
  • Although Tax avoidance is a legal method, it is not advisable as it could be used for one’s own advantage to reduce the amount of tax that is payable. 
  • Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax rules. 

Tax Evasion: 

  • Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like deliberate under-statement of taxable income or inflating expenses. 
  • It is an unlawful attempt to reduce one’s tax burden. 
  • Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. 
  • It involves illegal practices such as making false statements, hiding relevant documents, not maintaining complete records of the transactions, concealment of income, overstatement of tax credit or presenting personal expenses as business expenses. 
  • Tax evasion is a crime for which the assesse could be punished under the law.

Tax evasion and Tax Avoidance can leave our finances jeopardize for a long time, So we need to understand the terminologies and act accordingly.

Statement 1 - The objective of corporate taxation is to maximise corporate wealth. 
Statement 2 - Providing tax deductions, tax rebate under corporate taxation increases tax avoidance. Indicate whether true or false

Both statements are true
Both statements are false
Statement 1 is true but Statement 2 is false
Statement 2 is true but Statement 1 is false

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