How Can We Make Our Taxation Planning Simple And Effective?

Albert Einstein, the greatest scientist of all time, a genius and a maverick – whose contributions to physics reshaped the way we perceive the universe said, "The hardest thing in the world to understand is the income tax."

Isn’t that true for many of us? We may understand the toughest of concepts but when it comes to income tax several of us find ourselves totally lost. Well, I wish our curriculum taught us how to understand taxes in high school itself. And also, the reasons why countries collected tax - for we grew up grudgingly looking at the taxes.

Well to begin with, taxes are essential as they are the fundamental tools with which countries fund government operations, public services, infrastructure development and enhance social and economic goals. How else would you provide better education, healthcare, safety, sanitation, transport and business facilities? Also, taxation is a tool to ensure that the rich can contribute more to the country and that wealth and income inequality are addressed properly.

Significance Of Taxation Planning 

If we refer to the latest SBI research report we have much to celebrate in terms of progress as India’s per capita income is expected to rise from Rs 2 lakhs in FY 23 to 14.9 lakhs in FY 47 which means the great Indian middle class is on a rise and will be coming under the income tax ambit. So, let’s just agree with Benjamin Franklin when he says "In this world, nothing can be said to be certain, except death and taxes."

How do we make taxation planning simple? Everyone who is ever going to make any money must understand how the taxation system works to be able to minimise the overall tax burden.

One must not mix this with tax evasion. Tax planning is using legal methods and incentives to be able to minimise tax liabilities and make significant savings and investments in that process.

In India, we pay taxes in two ways. Direct Taxes and Indirect Taxes. To simply understand-direct taxes are levied on our earnings and indirect taxes are levied on our expenses.

Direct tax is to be paid by an individual earning a taxable income and in this piece we are looking at just that.

The most important of this tax type is the income tax which is levied each assessment year (1st April to 31st March) and as per the Income Tax Act, 1961 makes it mandatory for every citizen to pay tax if their annual income is above the minimum exemption limit. You can refer to this act for a detailed study of taxes and this chart to understand the various slabs of income tax calculation.

Once you know your slab you look at certain exemptions, deductions, and allowances mandated under the IT Act for you to be able to make some forced savings.

There are several tax deductions under sections 80C, 80D, and 80E and your tax planner, investment advisor and even relationship manager at the bank will tell you about them while making investments under those schemes.

Aligning Goals With Tax Planning

However, it is most important to align your life goals with your tax planning. For every stage of your life, your taxes would look different. Let’s start with the essentials.

If you are looking at education, buying a house, car or even starting a business- loans can help you with not just these targets but also in getting maximum tax benefits. Housing loan, education loan, business loans are particularly supported in the taxation process and one must avail them while planning taxes smartly. For example, if you check section 24 of the Income Tax Act you will find details on housing loan interest deduction.

Similarly, your financial plan must include plans to safeguard health and when you buy health insurance for your family and yourself, under section 80D there are deductions available.

Another tool for tax planning and saving is the house rent allowance and you can claim an exemption on your HRA under section 10(13A) and Rule 2A of the Income Tax Act, 1961. This is applicable even if you are living with your parents in a house that belongs to them.

We then come to savings and investment tools.

Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), and National Pension System (NPS) can help reduce taxable income. They come under retirement planning or long-term tax planning and must be considered.

When we look at mutual funds or equity shares, particularly equity-linked saving schemes one can get benefits under Section 80C (up to ₹1.5 lakh), while also offering potential for long-term capital gains that can be tax-exempt up to ₹1 lakh.

Also, worth mentioning here are some benefits and schemes that are specially designed for women in the Income Tax Act. For example, Sukanya Samridhi Yojna for the girl child. This year the budget introduced a new small savings scheme, Mahila Samman Certificate Scheme 2023, that offers a rate of 7.5% on deposits up to Rs.2 lakhs for all women investors.

Last but not least philanthropy.  There are several charitable donations that are eligible for tax deductions under Section 80G of the Income Tax Act. While it helps you with your social responsibilities it rewards you by reducing your taxable income.

Tax planning is no rocket science. All it takes is basic alignment with your financial goals and guide in the form of an advisor to help you navigate through the system. Chartered accountants and other investment advisors also provide their services in doing so but a lot of people find their way on the tax portal and file their own taxes.

Disclaimer: This article and discussion is for educational purposes only. Nothing discussed here should be considered as financial advice and you must do your own due diligence or take the advice of a SEBI-certified investment advisor before you take your investment decision. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

*The article is published in collaboration with BSE Investors’ Protection Fund to spread awareness with respect to personal finance and investing, especially for women.*