The evaluation of Financial affairs and Investments to reduce the burden of Tax on an individual is known as Tax Planning. It is quite a board term and includes Tax Management with it. Tax Management merely looks into the compliance with the Statutory Tax Laws with regard to disclosure of Income and filing within specified time. While Tax Planning looks at the legitimate ways by which the Tax liability could be brought down to minimum. It steers clear from the unfair practices such Tax Evasion and Tax Avoidance.
Tax Planning involves strategic planning to avail the deductions and reliefs provided under the Income Tax Act. Thus it is a long term planning which one needs to adopt. You have to keep a tab on the changes brought in at the Annual Union Budget with respect to Individual Taxation and other Financial Matters. Since these changes are announced well in advance Individuals should not wait for the last month to avail the deductions as this also might lead to financial stress. Now you might be thinking how would reducing your tax liability lead to financial stress???
Well, The answer is, to reduce your Tax Liability you will have to Invest certain amount in buying an Insurance policy or other notified Funds. Thus if you don’t plan before hand you might find yourself in a mess. Let us see the illustration below and refer to my previous post on Tax Slabs:
Suppose an Individual has an Annual Income of `5,00,000/- for the Assessment Year 2014-15. So his tax liability without availing any deduction U/S 80 C will be:
Rs 2,00,000/- to Rs 5,00,000/- 10% (amounting to Rs 30,000/-)
Further you will get a Tax Credit of Rs 2,000/-
So Your actual Tax Liability is Rs 28,000/- (Ignoring the Education Cess)
Now if You want bring down your tax liability by Rs10,000/- you need to invest Rs1,00,000/- in any of the notified fund under Section 80 C (to keep it short and simple I’m not going into elaboration of the investment). Hence if you have to pay Rs 1,00,000 plus tax liability of Rs 18,000/- in a single month then it will definitely put you under financial stress.
In order to avoid this type of situation Plan your Tax liability before hand and plan your investments. Also for salaried individuals it is advisable to pay your tax liability every month as Tax Deducted at Source (TDS).
This will help you to plan better and invest wisely.
I will discuss the Deductions available in my upcoming posts.