4 Essential Tax Planning Strategies for Financial Success

YouGov’s 2022 survey had few notable revelations. Around 74% of urban Indians agree that income tax is essential for India’s economic development. At the same time, 65% were not happy with the country’s existing tax structure. In light of these findings, individuals are increasingly recognizing the importance of strategic tax planning to navigate and optimize their financial obligations.

You may not know much about how the Indian tax system works. However, you can choose to pay your finances well. That’s where tax planning comes into play. It is nothing but the function of financial planning to ensure that there’s tax efficiency.

Taxes can take a toll on your annual income. How can you reduce your tax liabilities in a given financial year? Tax planning is the only legitimate way to do that. It makes use of the tax deductions, benefits, and exemptions offered by the tax authorities.

Taking these factors into consideration, it comes up with the ideal way to reduce your tax liability. The definition is quite simple. In simple words, the meaning of tax planning is analyzing and managing one’s financial situation. It is done from a tax perspective

In this article, you will get to know more about the concept of tax planning. Everything from the importance of tax planning to tax planning strategies will be discussed.   

Let’s Understand What It Is

As per the Indian tax system, the Central and State governments levied the major taxes. There are a few minor taxes which are usually imposed by local authorities. These include the Gram Panchayat, Municipality, and other regional bodies.

There are mainly two types of taxes: Direct taxes & Indirect Taxes
Both these taxes are quite the opposite. Direct taxes are charged on profits and income. Indirect taxes are imposed when you purchase goods or services.

The direct taxes are paid directly to the government. Unlike direct taxes, indirect taxes are collected from consumers using an intermediary. It is their responsibility to pay it to the government.

Direct taxes are charged on individuals and corporate entities. The most important one among direct taxes is the Income tax. If your annual income is over the minimum exemption limit, you should pay the income tax. It is stated in the Income Tax Act of 1961.

Capital Gains Tax and Corporate Tax are the other important direct taxes. Capital gains tax refers to tax from profits of selling a capital asset. Corporate taxes are calculated depending on the net income or profits from the business

Different types of indirect taxes include:

• Service Tax- It is a tax imposed on service providers for carrying out certain service transactions.
• Excise Duty- This is the tax levied on goods that are manufactured by a company in India.
• Goods and Services Tax- Also known as GST, it is levied on any item sold directly to the consumer.
• Custom Duty- It is charged on the goods that are imported to India.
• Entertainment Tax- This type of tax is applicable to goods and services related to entertainment.
  

Objective

If you are a taxpayer in India, you should understand the main aims of tax planning. The following are the fundamental objectives of tax planning:

1.Minimize Tax Liability

The primary goal of tax planning is the maximum reduction of your tax liability. As a taxpayer, you would want to reduce the tax burden and save for the future. The government provides a number of investment schemes these days. Liabilities can be reduced significantly by using them.

2.Minimize Litigation

Minimizing legal litigation is also crucial when it comes to planning taxes. It is recommended to consult a legal advisor. Adhere to the provisions of mitigation laws if you don’t want to go through judicial harassment.

3.Stabilizing Indian Economy

Taxes are a huge factor determining the growth of your country. You can contribute to building a productive Indian economy by paying taxes that are legally due. Thus, planning taxes is beneficial for you and the country you live in.

4.Profitable Investment

The money you save on your tax liabilities can be invested into productive channels. In other words, the earnings from a quality tax analysis can be turned into a productive investment. This helps in making smart investments that make the best use of the available resources.

Why Should You Do Tax Planning?

Tax planning helps you keep extra money to yourself by reducing liabilities. You can use this money to save, spend, or invest. That is the main reason why you should have a tax plan. The other reasons include:

Strategic Planning Can Reduce Taxes

Ultimately, tax planning is about minimizing your tax bill. Please make a note that planning is especially important if:

• If you own a business or are self-employed
• When you are about to experience a major event in life. For example, marriage, divorce or buying a home, etc.
• If you go through a significant change in income

Gives You Enough Time to Make the Most of Tax Benefits

Usually, people wait until the last moment to avail of a tax benefit. This may not always work. Effective planning requires you to allow some time to analyze the situation. That’s how you can make better decisions. Smart planning isn’t something that happens one day before you pay your taxes.

Allows You to Take Advantage of Changes in Laws

Tax laws tend to change a little every year. Be it major or minor, tax planning allows you to be ready for these changes. You will get an idea about how they will impact your taxes. This way, you can make wise decisions.

Also read: Understanding Direct Tax and Indirect Tax: What You Need to Know

Types of Tax Planning

The different methods of tax planning include

Short-Range

This method is thought of and executed when the fiscal year comes to an end. Investors usually adopt it to legally limit their liabilities at the end of a financial year. There are no long-term commitments in this method of tax planning. It can still increase your tax savings.

Long-Range

This tax plan starts at the beginning of a financial year. As a taxpayer, you will follow the plan throughout the year. Unlike short-range planning, you may not find sudden profits or other tax benefits. However, this plan is highly beneficial in the long run

Permissive

Here, the planning is done according to the provisions under the taxation laws in India. Indian taxation law provides a variety of provisions, such as deductions, exemptions, incentives, etc. For example, Section 80C of the Income Tax Act of 1961 provides deductions on different tax-saving instruments.

Purposive

This type of tax planning involves the use of tax-saving instruments. These are used with the aim that you get optimal benefits from your investments. It includes processes like:

• Selecting appropriate investments accurately.
• Creating an ideal agenda for replacing assets, if and when required.
• Diversifying income and business assets depends on your residential status.

How to Get Started?

You can start planning your taxes in the following steps:

Compute your GTI

First things first, begin by taking your Gross Total Income (GTI) into account. Here, you have access to your annual and monthly income accurately. This means you have to consider your income earned from all the sources.
The sources include:

• Income from salary
• Income from house
• Profits from business
• Short-term and long-term capital gains

GTI refers to your total income before any deductions under the Income Tax Act, of 1961. Then, learn about the different provisions of the Income Tax Act that are related to your resources. It is crucial to know the provinces that will have a direct impact on your personal finances.

This process of personal planning can be difficult, especially when you are a beginner. You can ask your company to do it or approach a tax consultant for individual planning.

Determine your NTI

Net Taxable Income (NTI) is an individual’s income after any taxable deductions. You can avail of many deductions under Section 80 of the Income Tax Act, 1961. Some of the deductions that help in reducing liability are:

• Investment in tax-saving instruments
• Interest paid for higher education loan
• Premium payment for medical insurance

Calculate Payable Tax

After all the deductions, the next step is to calculate tax liability. It is based on the income tax slabs of that particular financial year.

Best Retirement Saving Strategies

Here’s a list of tax-paying strategies to reduce taxes on your retirement income:

Pay off all Debts Before Retirement

High-interest debts such as car loans, personal loans, and credit dues don’t provide tax benefits. Thus, settle these kinds of outstanding dues before you retire. It helps you use your entire income to cover your living costs. This way, you can continue your lifestyle on a low-income slab.

Plan your Expenses

By the time you retire, you may not have to worry about all the major expenses. You would have bought your property. Your children’s education would have been taken care of. All these major expenses are out of your way, it is time to think about daily expenses. Track your monthly expenses. Don’t overspend on things you don’t need.

Choose the Right Investment Schemes

You have to choose the ideal investment tools to benefit from the tax deductions. Approach a professional who can suggest the best plans for you, if needed. Invest in products that provide tax-free maturity amounts.

Key Takeaway

Taxes in India are divided into two major categories: direct and indirect taxes. Direct taxes are the taxes that you pay to the government directly. On the other hand, indirect taxes are the taxes you pay on purchasing a good

Direct taxes are imposed based on your income. This can be from various sources such as salary, capital gains, property, etc. Among all the taxes, income tax is the most important one. You can reduce your tax liability with the help of tax planning.

For that, associate your taxable income aspects with the right provisions of Indian taxation law. Make sure that you choose the ideal investment schemes. That will have a huge impact on your retirement plans.

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