Introduction
Taxes eat up a good portion of an individual’s earnings and savings. This is more true when one is not aware of the benefits of tax planning. Tax planning is done for tax savings. This is a legal process and is done with the help of a financial planner. There are a few core concepts regarding the planning and ways to carry out tax planning.
Several advantages and benefits of tax planning. Some of the benefits are:
Increase in productivity
The funds saved by tax planning can be used for investment in other income-generating sources. Investing in projects or shares of a company is an example.
Decreasing Litigation
Tax planning benefits an individual in decreasing litigation. Litigation is a process by which taxes are managed legally.
Attaining economic stability
Tax planning is beneficial for the economic stability of the taxpayer. Tax savings can be used for other purposes of an individual leading to their economic stability
Curtailing liabilities
Funds saved from taxes can be used for investments in other funds such as long-term equity funds or mutual funds and these result in curtailing the liabilities of a taxpayer.
Steps involved in tax planning
Calculating total gross income of the taxpayer: in this category, the total gross income which includes all the sources of income is calculated.
The total taxable income: The income that is collected by the government as tax.
The payable tax: At the beginning of every financial year, the government sets the taxable income into several income slabs.
Some Tax savings tips with the help of tax planning
Using the benefits of section 80
This is the most go-after method that people use to receive tax deductions. The government of India provides its citizens with deductions in taxes and encourages the habit of saving with the help of section 80. The most popular investment methods for tax planning are PPF accounts, 5-year tax-saving deposits, Equity funds, mutual funds, pension plans, life insurance policies, etcetera.
Investing in Unit link Insurance plans (ULIPs)
ULIPs are special insurance plans which can help you plan your taxes and save you money. There are a variety of life insurance policies and investments under the ULIPs. When an individual puts his money in ULIPs, some of the amounts go to life insurance purposes and some of the amounts are used for investments in equity-based funds. A taxpayer enjoys dual benefits of tax planning such as tax exemption and investment at the same time.
Investments in mutual funds
Investment in mutual funds is one of the most common ways of reducing an individual’s taxable income. Investing in Equity Linked Savings Scheme (ELSS) helps the taxpayer in receiving deductions under section 80C. One of the benefits of investing in mutual funds is their short time maturity. It also provides high returns in comparison to other funds.
Tax deductions on salaries
An individual working in a firm can apply for house rent allowance, travel allowance, and other allowances to be included in their salary. These allowances are eligible for deductions under section 80.
Philanthropic acts can save you taxes
Donation made for charity also comes with tax deductions. This deduction is provided by the government to encourage philanthropic acts. In this category, one can also make donations to the National relief funds.
Conclusion
Taxes are an important source of income for the government and the person that comes under the taxable income category should pay their taxes. But there are also some provisions under the law that allows a taxpayer to save their taxes and invest them for other purposes.
Tax planning helps an individual in investing their money systematically and beneficially. This money helps the economy prosper and hence helps the government to use that invested money for many developmental purposes.