Tax Planning

Logical analysis of a financial situation or plan from a tax perspective, to align financial goals with tax efficiency planning. The purpose of tax planning is to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible. Tax planning thus allows the other elements of a financial plan to interact more effectively by minimizing tax liability.

Tax planning is one of the most important aspects of personal finance. People often fail to look at tax planning objectively and straight away start making investments related to tax saving. Also they often tend to mix tax planning and investment planning, which are totally different and are made with varying objective.

Insurance for long has been the front-runner whenever investments regarding tax savings are considered. Life insurance is not an investment option but a financial tool, which protects from any unforeseen eventualities. Buying excessive insurance however leads to holding unnecessary products.

Savings under section 80C can be broadly classified as investment based and non-investment based.

Provident Fund (PF), Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Savings Certificates (NSC), National Pension System (NPS), Fixed deposit (FD) and Equity Linked Savings Scheme (ELSS)come are investment based savings; while principal repayment of home loan, tuition fee are non-investment based.

Before making investments related to tax saving it is always important that the individuals must analyse their risk appetite, and determine the percentage of debt and equity exposure they are comfortable with. Then they can match these percentages of debt and equity while investing in the available tax saving investments.

Since the risk appetite, liquidity needs and current portfolio of every individual are different, making investments based on just returns is not advisable.



2-5 lakh

With raising inflation, saving money is getting difficult for the professionals who fit in this income slab. Because of lack of knowledge about different tax-saving options, some professionals commit the mistake of making 80C investments even when it is not necessary.

They have to make sure that they deduct HRA and contribution to PF from the taxable income before calculating their tax liability. This gives an assessment of savings they can make under section 80C. The tax savings made by investing in 80C is directly proportional to the tax slab. The maximum amount these professionals can save by making tax saving investments under 80C is Rs 10,000. Considering the liquidity issues associated with tax saving investments, it is really important that these professionals should prioritise between the goals they want to achieve and tax savings.

6- 10 lakh

The professionals in this salary bracket should try to maximize the benefits they receive from tax-saving avenues other than 80C. The maximum tax saving they receive under 80C is Rs 20,000. Buying a home, especially if both the spouses are liable to tax, is a good option. This gives an additional option to claim the interest rate paid on home loan under section 24B up to a maximum amount of Rs 1.5 lakh.

Above 10 lakh

The professionals in this tax bracket can enjoy a tax benefit up to Rs 30,000 by making the tax saving investments which account for section 80C. The tax-planning strategy of such professionals revolves around making use of tax saving options to cut short their income tax rate from 30-20 per cent or 10 per cent. Taking a home loan if planning to buy a home, can be one of those options.

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