Tax Planning

Why it is important.  Tax Planning is the analysis of the Financial Position concerning the payable tax liability. Tax Planning is an important component of Financial Planning and enables the entity to reduce tax legally.

Different Types of Taxes

Income Tax

Income Tax lies under the category of direct taxes. An individual having an annual income of Rs.2.50 Lacs per year is required to pay the tax. Tax is levied at various Tax slabs  based on the income.

Good and Services Tax(GST)

GST lies under the category of indirect taxes and was introduced in place of sales tax. It is charged on all Goods and Services Produced.

Capital Gain Tax

CGT is paid on profit made on the sale of Fixed Assets, Shares or Stocks. It is divided in to long term and short term capital gain, which attracts a different Tax Rate.

Property Tax

Property Tax is levied by the local authorities like Municipal Corporations etc. on the Residential and Commercial Properties.

Corporate Tax

Corporate Tax is a direct tax imposed by  a government  on the income or capital or corporations or other legal entities. It can either be  at the national level, state level or at local level based on the size and function of entities.

Steps in Tax Planning

Step 1: Forecasting of Total Income and Taxable Income

The total income of the year to be estimated in advance. Based on the total income, Taxable income also to be estimated. This will help in proper tax planning for the ensuing Financial Year.

Step 2: Investment and Expenses

Once expected total income for the year is known, the expenses and Investible surplus can be estimated. Investment in Tax Saving Schemes may be started the beginning of the year. We may start investing in Equity Linked Saving Schemes(ELSS) of mutual Funds through monthly SIP or start contributing to the PPF Scheme. This will reduce the pressure at the fag end of the Financial Year.

Step 3: Assessing Tax Liability Regularly

During the year, Tax Liability is to be assessed regularly based on the income. This will help in keeping the tab on Tax Liability  so that there will not be any panic at the end of year.

Step 4: Social Security Planning

It mainly includes Insurance Planning, Both Life Insurance and Health Insurance. Life insurance is obtained to save the family from the hardships in the unfortunate death of the family’s bread earner. Similarly, Medical Treatment have become very costly nowadays. Health Insurance takes care of unforeseen expenses of Health problems.

Step 5: Paying Advance Tax

As per the forecast of tax liability, if advance tax is to be paid, we must pay the same within the stipulated time to avoid interest for the delayed period or penalty levied.

Step 6: Filing of Income Tax Returns

We must file Income Tax Return at the end of year within time to avoid any penalty.

Step 7: Safekeeping of Documents

All the documents viz. details of investments, transactions, bank statements etc are to be kept safely at one place. It is advisable to maintain the same Financial Year-wise.

Benefits of Tax Planning

  1. Helps in assessing proper estimated income  for the ensuing Financial Year and assessing the correct tax liable to be paid.
  2. Helps in Proper investment planning to  save the taxes.
  3. Saves from the last minute rush in assessing and paying the taxes which may lead to pay more taxes and inappropriate investment planning.
  4. It enables us to file the Income Tax Return in time which may avoid the penalty and paying of interest otherwise.
  5. It helps in maximizing the tax relief and reducing tax liabilities