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Tax Planning: Its Importance, Investments to Consider, and Steps to Tax Planning

Personal Finance Know More 22-11-2022 | 5 mins read

Saving the right amount of tax depends on your income tax planning. Certain tools will help you save tax by extending the Income Tax Act’s deductions. But don’t worry! It is not as complicated as it seems to be. If you take the necessary precautions and steps that promote legal tax savings, it can benefit you.  Start your tax planning process by understanding how much you want to save. After that, you can determine your risk appetite and see the amount of tax exemption you could get from those investments. This way, you can meet your financial goals quicker with a balanced amount of tax that you would have to pay. If you keep delaying your tax planning, you might save no money. So, keep all your plans ready to protect yourself from the rush and stress that comes as the ITR filing date is nearing.

Types Of Taxes 

  • Direct Tax: This tax is levied on and paid by the same person. The burden of these taxes cannot be shifted to another. For example, income tax. 
  • Indirect Tax: This type of tax is imposed on the goods and services that the customers avail. Hence, the burden of the tax shifts to the person purchasing the goods and services in the end. For example, GST. 

They are an essential fiscal policy tool of the Government. The authorities determine the tax rates, and everyone paying taxes must abide by them.    

Importance Of Income Tax Planning

The benefits of tax planning extend beyond a single fiscal year. 

  • It allows you to understand your future financial goals and helps you achieve them. A long-term investment yields a higher return than a short-term one. Special investments can be added to your income tax planning process. We will read about them later in this article. 
  • They instill a sense of healthy spending within the mind of an individual. This is because they motivate you to keep aside some of your income for investments that will help in tax savings. 
  • The investments offer tax savings, returns, and transparency that build investor confidence. 

Many deductions mentioned in the Income Tax Act can be availed if the investments are made smartly. Tax-exempt securities can play a major role when tax planning is done.

Investments To Consider During Tax Planning 

Here are certain investments that are to be included in your income tax planning task so that you can avail of the deductions during ITR filing:

  1. Fixed Deposits: Section 80C of The Income Tax Act, 1961, allows you to avail of a deduction of up to INR 1,50,000 if you invest in tax-saving fixed deposit schemes. However, your money will be locked in for 5 years, and you must pay taxes on the interest rate ranging from 5% to 8%.
  1. Public Provident Fund (PPF): In this, you have to open a PPF account with a bank or a post office. You will be given a fixed interest rate on your investment, and up to INR 1,50,000 can be saved through section 80C. 
  1. National Savings Certificate (NSC): Under Section 80C, mid-level investors can enjoy tax benefits with the bonds issued. With a savings account in a bank or a post office, you can buy an e-certificate through online banking. 
  1. Unit Linked Insurance Plan (ULIP): These offer you a chance to choose between debt and equity investments, and you can shift the allocation. You can avail of tax savings under Section 80C and 10(10D). 
  1. Life Insurance: These plans not only provide security for you and your family, but they also have a lot of tax benefits. Under Section 80C, the premium paid is tax deductible up to INR 1,50,000, and the amount received on maturity or death is tax-exempt under Section 10(D). 
  1. Tax Saving Mutual Funds: These are also called equity-linked savings schemes. The lock-in period is 3 years; investors with a medium or high-risk appetite invest in these. These investments are deductible under Section 80C; in case of death or maturity, they are free from tax under Section 10(D). 
  1. Mediclaim: These offer deductions under Section 80D. For senior citizens, the tax benefit is INR 20,000, and for other citizens, it is INR 15,000. So, if you have a policy that includes you and your senior citizen parent, you can get a tax benefit of INR 35,000. 

Steps In Income Tax Planning

Keep your tax planning perfect to avoid panic when it is time for ITR filing. Here are the steps you need to know:

  1. Don’t Consider It to Be Cumbersome: This is one of the biggest mistakes you can make when considering starting your tax planning. The procedure is simple and can be done with careful consideration.
  2. Start At an Early Stage: Do not delay the planning until the date of ITR filing comes near. Also, tax planning is a continuous process and does not stop until the ITR is filed. 
  3. Calculate Your Taxable Income And Tax Liability: If you know your tax liability, you will be able to estimate the amount of tax savings you have to make. So, to save on tax, you need to invest in assets that offer this benefit. 
  4. Know Your Risk Appetite: Estimate the risk you are willing to take. This will help you decide on the right investments for your portfolio. 

Invest: The final step in income tax planning is to invest your money in tax-saving investments based on your risk appetite.

Key Takeaways 

There is no cap on the number of tax-saving investments you can make. So, pay close attention to your tax planning and maximize the benefits. Different assets have different tax-saving limits. Do your research correctly and be a smart taxpayer.

Piramal Finance offers you relevant information regarding multiple banks across India. You can visit our website for any banking loan-related query or understanding of tax resolutions. The financial experts will help you better understand your bank account and make informed financial decisions.

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