Why is it Important !
Tax planning help you in rationalizing your tax liabilities!
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 liability legally.
Different Type of Taxes
Capital Gain Tax
CGT is paid on the profit made on the sale of Fixed Assets, Shares or Stocks. It is divided into long-term and short term capital gain, which attracts a different tax rate.
Income tax
Income tax lies under the category of direct taxes. An individual having an annual income of more than Rs. 2.50 lakh per year is required to pay the tax. Tax is levied at various tax slabs basing on the income.
Excise Duty
Excise duty refers to the taxes levied on the manufacture of goods within the country, as opposed to custom duty that is levied on goods coming from outside the country. For example, It is charged on food items, petrol and liquors.
Corporate Tax
Corporate tax is a direct tax imposed by a government on the income or capital of corporations or other legal entities. It can either be at the national level, and may be imposed at state or local levels based on size and function of companies.
Property Tax
Property tax is levied by the Local authorities Like Municipal corporations etc on the residential and commercial properties.
Goods and Service Tax
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.
Steps in Tax Planning
Forecasting
Forecasting of Total Income and Taxable Income
Investment and Expenses
Equity Linked Savings Scheme of Mutual Funds through monthly SIP or contribution to the PPF schemes.
Assessing Tax Liability
Tax liability need to be assessed regularly based on the income.
Advance Tax Payment
Pay within the stipulated time to avoid interest for the delayed period.
Income Tax Return (ITR) Filing
You should file Income Tax Return at the end of the year within time to avoid any penalty.
Safeguarding Documents
It is advisable to maintain track of all financial records year-wise in a safe place.
The total income for the year to be estimated in advance. Based on the total income and taxable income also to be estimated. This will help in proper tax planning for the ensuing financial year.
Once expected total income for the year is known. The expenses and the amount available for investment can be estimated. Investment in tax savings schemes may be started at the beginning of the year. We may start investing in Equity Linked Savings Scheme 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.
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 be no panic at the end of the year..
It mainly includes Insurance planning, Both Life 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 treatments have become very costly nowadays. Health insurance covers the unforeseen expenses of health problems.
As per the forecast of the 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.
We must file our Income Tax Return at the end of the year within time to avoid any penalty.
All the documents viz. Details of investments, Transactions, Bank statements, etc are to be kept safely in one place. It is advisable to maintain the same financial year wise.
Benefits of Tax Planning
- Helps in assessing proper estimated income for the ensuing financial year and assessing the correct tax liable to be paid
- Helps in planning the proper investment plan to save the taxes
- Saves from the last-minute rush in assessing and paying taxes. Which may lead to paying more taxes and inappropriate investment plan
- It enables us to file the Income Tax Return (ITR) in time. Which may lead to paying more taxes and inappropriate investment plan
- It helps in avoiding imposing of penalties and payment of interest
- It helps in maximizing the tax relief and reducing tax liabilities
Common Mistakes in Tax Planning
Procrastination: This is the most common mistake. Any delay in planning leads to a last-minute rush and paying more taxes. Sometimes it may lead to paying penalties and litigation also.
The investment made in Life Insurance products: Many times investments are made in the insurance products without an assessment of its requirement just for the sake of availing tax benefit. This results in erratic investment planning.
Failing to avail the tax benefits available in other sections of Income Tax: Section 80C is the most popular section for availing tax benefits. Whereas tax benefits are available in other sections also viz; Section 80DD, 80E, 80G, 80GG, A10(1), etc.
Incorrect Estimated Income: Not assessing the estimated income for the ensuing financial year properly. Accrued but not received income not included in the total income.
