What should be the objective to plan my taxes?

Last Updated: 7 Jun 2022

Tax planning is the most vital activity you can undertake to ensure a burden-free financial future. People who are liable to pay taxes always try to find ways to lower their taxable income and reduce their tax liability to ensure more savings. However, being unaware of where and how much to invest, people end up paying a hefty portion of their income as tax.

One of the best ways to ensure that you save the highest amount of tax is through tax planning, allowing you to increase your wealth through strategic investments.

What is Tax Planning?

Tax Planning is a part of Financial Planning and is the action conducted by taxpayers to reduce their taxable income and tax liability. The process begins with calculating your taxable income and then investing in certain financial products to avail of tax deductions before the end of the financial year as prescribed under the various sections of the Income Tax Act. The objectives of tax planning are directed towards leveraging these tax deductions to their limit to ensure you invest towards securing your financial future while paying your taxes on time.

What are the various types of Tax Planning?

The four common types to achieve the objectives of tax planning include:

• Short Range Tax Planning: This form of tax planning is usually undertaken at the end of the financial year. The objective is to invest in tax-saving investments without having to commit to a long term investment.

• Long Range Tax Planning: Tax planning of this sort usually commences at the start of the financial year. The objective is to stay invested in tax-saving investments for a long time to reap long term benefits.

• Permissive Tax Planning: Taxpayers undertake this type of tax planning by investing under the various tax-saving investments mentioned under the Income Tax Act. The objective is to utilise the available exemptions, deductions and incentives.

• Purposive Tax Planning: Purposive tax planning is helpful in achieving a specific goal of their financial plan. For example, insurance plans protect you from unforeseen circumstances along with being tax efficient.

Why should you make tax planning a part of your financial plan?

Tax planning offers numerous monetary advantages to taxpayers. Here is how tax planning can help you in achieving long term financial growth:

• It reduces taxable income: Tax planning includes investing in various tax-efficient financial products such as insurance, PPF, FDs etc and the contributions are offered as tax deductions to the taxpayers. As a taxpayer, you can claim deductions under certain sections of the I-T Act, thereby reducing your taxable income and tax liability.

• It increases savings: Tax Planning leverages tax deductions that are available under the various Income Tax Act sections such as Section 80C, 80D etc. Since the taxpayers don’t have to deposit a portion of their income as tax, the investment amount makes up for increased savings.

• It promotes economic stability: Through effective tax planning, taxpayers invest their money in smart investments tools or government-backed schemes. It promotes the inflow of funds and promotes economic growth.

• It creates long term wealth: Tax-saving strategies create long term wealth for the taxpayers as they invest a portion of their income in safe and high return investments. As taxpayers keep on contributing to these investments, compound interest multiplies their wealth over time.

• It creates long term wealth: Tax-saving strategies create long term wealth for the taxpayers as they invest a portion of their income in safe and high return investments. As taxpayers keep on contributing to these investments, compound interest multiplies their wealth over time.

Common Mistakes People Make Regarding Income Tax

Most people often wonder why they are unable to save more and end up paying higher taxes than other people in the same tax bracket. It is mostly due to the following common mistakes:

• Less Knowledge: Many people have lesser knowledge about the income tax process and tax-saving investments under various sections. This results in a higher tax payment that would have otherwise been reduced through tax-saving investments.

• Procrastination: People feel that the process of tax deductions is complex and time-consuming. They procrastinate until the deadline to file taxes approaches. With no time left, they pay taxes without claiming any tax deduction.

• Over budget: People who are knowledgeable and invest in tax-efficient investment sometimes go over budget with their contributions. They invest in multiple tax saving tools and end up creating a financial burden.

• Investing a lesser amount: People often fear investing in multiple tax-saving investments and do not utilise the tax deduction limit to its full potential. Although they save a small amount in tax, they fall short of saving more.

What are the income tax slabs under the Income Tax Act in India?

Here are the current tax slabs to explain income tax and understand your tax liability:

Net Income Range (Annually)	Rate of Income Tax
Up to Rs 2,50,000	NIL (0%)
Rs 2,50,000 to Rs 5,00,000	5%
Rs 5,00,000- Rs 7,50,000	10%
Rs 7,50,000- Rs 10,00,000	15%
Rs 10,00,000- Rs 12,50,000	20%
Rs 12,50,000- Rs 15,00,000	25%
More than 15,00,000	30%

How to save income tax through effective tax planning in India?

The Income Tax Act, 1961 includes provisions for various tax deductions that a taxpayer can utilise to lower their total taxable income. Following are the sections and their applicable deduction limit, which you can consider to save tax:

Tax Deduction Limit	Applicable Section
Up to Rs 1,50,000	80C
Up to Rs 1,50,000	80CCD
Up to Rs 1,50,000	80CCD(1)
Up to Rs 1,50,000	80CCD(2)
Up to Rs 1,50,000	80CCG
Up to Rs 1,00,000	80D and 80E
Up to Rs 1,00,000	80EE
Up to Rs 1,00,000	80G
Up to Rs 1,00,000	80TTA
Up to Rs 50,000	80CCD(1B)

What should be your objective to plan your taxes?

Now that you know the objectives of tax planning, you have a general idea of what you have to do. However, you can consider the following key points to plan your taxes most effectively:

• Review your finances and identify how much you can invest.

• Research various tax-saving investments under the sections mentioned above to figure out the ideal and most suitable investments.

• As your objective is tax saving, it is wise that you contribute to investments that are fully directed towards tax saving.

• The investments you choose should be budget-friendly and so that you can continue them for the long term.

• You should consult a financial advisor before commencing the tax planning process.

Conclusion

Your objectives of tax planning should be fully directed towards securing your financial future by utilizing the available tax deductions. With prior knowledge and research, income tax planning can prove to be highly beneficial in allowing you to pay the least amount of tax. It can infuse an investing disciple and create a long term investment horizon for you to reap gains from various high return investments. You can choose from distinct tax-saving instruments based on your tax slab, financial condition, financial goals and move ahead in your journey of being financially secure. Happy Investing!