You may be surprised to know that the history of taxation in India goes back almost 2,300 years. Before our ancestors pioneered the concept of currency, taxes were paid with cattle, grains, or even silk. Later, people had to pay a portion of their income to the government in the form of gold, silver or copper coins. Even today, all salaried resident and self-employed individuals are required to pay taxes on or before the culmination of each financial year. That said, most tax liable individuals wait till the very last hour to plan their tax savings, even though tax payments are a certainty.
At the end of each financial year, most people scramble to get their tax investment proofs in order or start looking for tax-saving instruments. As a result, they end up making investments into inefficient tax saving instruments. Therefore, it is essential that you start planning your taxes as early as possible for the new financial year. This will not only help you choose the best tax saving investments but also maximise your savings into long-term gains.
What is Tax Planning?
In simple terms, taxes are fees charged by the government on an income, service or product. While paying tax is obligatory in India, there are several ways in which you can reduce your tax liability. Depending upon your current financial status, you can meet your tax obligations through systematic tax planning. You can reduce your total payable tax by accounting for all payables, deductions, permissible exemptions and reliefs available under the Income Tax Act.
Through efficient tax planning, you not only protect your capital but also ensure long-term wealth creation. Therefore, you can save more through tax planning and put a strong foot forward towards fulfilling your life goals.
Tax Planning Process
When we talk about tax planning, it is important to remember that you cannot create an effective tax saving plan overnight. Instead, you need to step-by-step ascertain your position regarding your Net Taxable Income and Gross Total Income. This would help achieve your objective of long-term wealth creation and capital protection. Here’s how you can proceed with the process of tax planning:
Step 1: Calculate Your Gross Total Income
To start your tax planning exercise, first calculate your Gross Total Income, which would be your cumulative income after adding up income from salary, house property, business, capital gains (both short-term and long-term) and other sources, if any. This step helps you ascertain your total income earned during a financial year without reducing any tax deductions as specified under the Income Tax Act.
Step 2: Calculate Your Net Taxable Income
After calculating your Gross Total Income, you need to proceed with the computation of your Net Taxable Income. For this, you need to reduce the various deductions set out under Income Tax Sections from your Gross Total Income. Here are some deductions that can help you reduce your tax liability, along with the relevant Sections:
- Investments made into tax saving instruments like life insurance plans (Under Section 80C)
- Premium paid under health insurance (Under Section 80D)
- Expenses on a handicapped dependent (Under Section 80DD)
- Interest paid for education loan (Under Section 80E)
- Interest paid on a home loan (Under Section 80EE)
- Donations made towards charitable organisations (Under Section 80G)
- Rent paid for residential accommodation (Under Section 80GG)
Step 3: Calculate Your Tax Payable
Once you have effectively reduced your tax liability in the prudent way described above, you may proceed with the calculation of your tax liability, as per the latest income tax slabs. Given below are the tax slabs for the AY 2019-2020.
Tax Slab for Individuals below 60 Years of Age
AGE INCOME TAX SLABS INCOME TAX RATE Less than 60 years Up to 2,50,000 Nil 2,50,000 to 5,00,000 5% (5,00,000 – 2,50,000) + 4% cess 5,00,000 to 10,00,000 20% (10,00,000 – 5,00,000) + 4% cess More than 10,00,000 30% (Annual Income – 10,00,000) + 4% cess
Tax Slab for Individuals ageing between 60 to 80 years
AGE INCOME TAX SLABS INCOME TAX RATE 60 years to 80 years Up to 3,00,000 Nil 3,00,000 to 5,00,000 5% (5,00,000 – 3,00,000) + 4% cess 5,00,000 to 10,00,000 20% (10,00,000 – 5,00,000) + 4% cess More than 10,00,000 30% (Annual Income – 10,00,000) + 4% cess
Tax Slab for Individuals ageing Above 80 Years of Age
AGE INCOME TAX SLAB INCOME TAX RATE Above 80 years Up to 5,00,000 Nil 5,00,000 to 10,00,000 20% (10,00,000 – 5,00,000) + 4% cess More than 10,00,000 30% (Annual Income – 10,00,000) + 4% cess
Smart Tax Planning Tips
AgeIf you are young, then for prudent tax planning, you must opt for market-linked tax saving instruments such as Unit-Linked Insurance Plans (ULIPs) or Equity-Linked Saving Scheme (ELSS). At a younger age, your risk tolerance is generally high. By starting with tax planning early; therefore, you can make more aggressive investments and create a corpus over the long term, to create a financially secure future for yourself.
IncomeSimilarly, if your income is high, you can be more willing towards investments into riskier tax saving options. Therefore, you can park more money into market-linked tax saving instruments, which have the potential of generating higher returns over the long term. In case your income is not much, or you don’t want to put your investments at risk, you can opt for tax saving tools that offer assured returns. Therefore, you can put your money into instruments such as Public Provident Fund (PPF), 5-year Bank Fixed Deposits, National Savings Certificates (NSC), 5-year Post Office Time Deposits and Senior Citizen Savings Scheme (for senior citizens)
Financial goalsTax planning exercise is also influenced by your financial goals. For example, if you wish to retire five years from now, you must have a tax saving portfolio that is less skewed towards riskier investment options such as market-linked tax saving instruments, and more towards investment options that are less affected by market volatility. Tax planning is crucial if you don’t want to lose a significant portion of your hard-earned income. With an effective tax saving plan, you can systematically meet your tax obligations, while keeping your current financial status in mind. Also, tax planning helps you work consistently towards your future goals by making use of various income tax saving options after considering your age, financial goals, investment horizon and risk appetite. Therefore, you need to complement your tax planning exercise with your overall investment planning, to reap maximum benefits.