Tax Planning for Individuals under Income Tax Act, 1961

Tax Planning is the process of evaluating a financial plan or conditions in relation to taxes in order to achieve the greatest possible tax efficiency by coordinating all of the financial plan’s elements to function efficiently with regard to taxes. A financial plan’s key component is tax planning, which lowers tax obligations and increases contributions to retirement plans. Additionally, in order to get the greatest outcomes, various retirement plans and investments must be combined with Tax Filing and deductions. Tax planning places a strong emphasis on several factors, including the timing of income, the timing of purchases, the magnitude of expenditures, and the planning associated with those expenditures.
This article briefly explains Tax Planning for Individuals under Income Tax, Benefits, and the Importance of Tax Planning.

Tax Planning for Individuals under Income Tax Act, 1961

All taxpayers in India have access to a variety of tax-saving choices. Wide-ranging exclusions and deductions are possible with these alternatives, which helps keep the overall tax burden under control. Sections 80C through 80U offer deductions, which qualified taxpayers may claim. These deductions are made from the total amount of tax obligations. Other provisions of the Income Tax Act, of 1961, such as tax credits and exemptions, might lower your tax obligations.

Tax planning is entirely legal and, in fact, a wise choice when done within the boundaries established by the relevant authorities. However, employing shady strategies to evade tax obligations is against the law, and you risk legal repercussions. Tax avoidance, tax evasion, and tax planning are all ways to save money on taxes. The only legal way to lower your tax obligations out of these is through tax planning. The government provides a variety of tax-saving alternatives with the goal of lowering tax burdens on taxpayers through ethical income tax planning strategies.

Types and Role of Tax Planning

Any person’s potential to thrive financially depends on their ability to manage their taxes since one cannot avoid paying taxes if their income is in a certain income tax bracket. The right tax planning assists people in streamlining their tax payments, ensuring returns over a specific time period, and lowering their tax liabilities.

Three categories of planning, including tax planning, are as follows:

• Adaptive tax planning that complies with the law is known as Permissive Tax Planning.
• Tax preparation that is done with a specific goal in mind is referred to as purposeful tax planning.
• Long-Range/Short-Range Tax planning is the planning done at the beginning and at the end of the fiscal year.

Benefits and Importance of Tax Planning

Although paying taxes is a big part of a person’s obligation to the country, you may use financial planning to reduce your taxes while still carrying out your civic duty by taking advantage of the government’s tax-saving programs. If you carefully follow the tax planning guidelines created by a CA or CS specialist, you can do this. Legal Window can help you with this.

Timing of income, the timing of purchases, budgeting for expenses, and size are all factors to be taken into account during tax planning.

Tax planning is essential for both small and large enterprises since it will aid in accomplishing business-related objectives.

Benefit from a deduction for Tax Planning

Individuals and members of the Hindu Undivided Family are eligible for advantages under deductions under Sections 80C and 80CC of the Income Tax Act, 1961. If the policy is taken out in the individual’s name, the name of his/her spouse, or the names of his/her children, the premiums paid during the policy duration are eligible for tax savings under this provision.

Only premium amounts whose values do not exceed 10% of the total amount covered in the policy issued on or after April 1, 2012, are eligible for this sort of deduction. The deduction will be permitted for premium payments of up to 20% of the aggregate insured amount for policies issued before March 31, 2012.

These advantages are available on investments up to 1, 50,000 in life insurance products in accordance with Section 80C of the Income Tax Act, 1961.

• Under Section 80CCC: Only pension plans are eligible for deductions. For up to one lakh fifty thousand in premiums paid to the plan, deductions are permitted.
• Under Section 80D: Along with policies purchased in the names of a person, his or her spouse, and any dependent children, deductions are available for individuals or a member of a Hindu Undivided Family. The highest amount that may be deducted is 25000 rupees. However, if the policy is in the name of the parents, an extra deduction advantage of 25,000 rupees can be obtained.
• Under Section 80DD: The annual deduction for premiums paid on insurance taken out in the name of a dependant who is disabled is INR 75,000 (disability is greater than 40% but less than 80%). For persons who are severely handicapped (disability is greater than 80%), a deduction of INR 1, 25,000 is permitted. This deduction has a set amount that is made regardless of actual spending.
• Under Section 10 (10D): Taxes are not applied to benefits received under a life insurance policy. Such benefits also include any money received from the insurance under Section 80DD (3), the Key Man Insurance Policy, or in bonus form.
• Under Section 80C: Through tax-saving investment programs, Section 80C allows taxpayers to save up to INR 1, 50,000 per year in taxes. The best of these is the equity-linked savings scheme (ELSS), which provides a dual advantage of tax reduction and financial gain. Other government savings programs, like as Public Provident Fund (PPF), tax-saving FDs, and National Savings Certificate (NSC), are also quite advantageous and provide deductions of up to INR 1.5 lakh when cumulative deposits are made in these choices. Payments paid for children’s school or tuition fees and principal repayment on house loans are also eligible for deductions under Section 80C.
• The HRA Exemption: Taxpayers who rent an apartment are entitled to claim an HRA exemption on the rent they pay as long as they present the rent receipts issued by their landlord. The least of the following amounts of exemption is available for the claim:
  • The total HRA granted.
  • 10% of the base pay minus the total amount of rent paid.
  • Taxpayers who reside in non-metropolitan areas pay 40% and 50% of their basic salaries, respectively.

• Under Section 80E: When an education loan has been taken out, it is possible to deduct the interest paid (a component of the EMI) on that loan under Section 80E of the Income Tax Act, 1961. Deduction Amounts claimed under Section 80E may be used for up to 8 years or until the interest has been paid, whichever comes first. The amount of the deduction has no upper limit.

Additional Exemptions and Deductions

In addition to these exemptions and deductions, there are additional ways to reduce your tax bill, such as giving to charities or qualifying organizations, which are exempt from taxes by 50% to 100%. Contributions given to the charity listed A 100% deduction is permitted under Section 80G. Donations to organizations like the National Defense Fund, the Prime Minister’s National Relief Fund, and the National Foundation for Communal Harmony are also fully deductible. Through tax-saving investments that provide financial development in addition to reducing tax expenses, every taxpayer must wisely manage their tax responsibility. All of this is possible with wise tax preparation.

Takeaway

All persons that fall within the Income Tax category are required to pay taxes. Today, Tax Planning is essential to lowering tax obligations via the use of various investment strategies allowed by the Income Tax Act, of 1961. With the use of tax planning, one may arrange their tax payments such that they would obtain sizable returns over a particular time period with no risk. Additionally, efficient tax preparation can lower one’s tax obligation.

Further, you can connect with our Experts at Legal Window. Our Experts would assist you with Tax Planning.