Every year, Indians have to pay a hefty amount as part of tax to the government. It doesn’t matter whether the individual is a salaried professional or a businessperson because the liabilities are quite high in either case. Although exemption rules are put in place, saving taxes and reducing these liabilities won’t be possible without proper planning. From understanding the difference between tax deductions and credits to tweaking the T-4, there are several ways through which you can manage your finances efficiently. 

Having said that, we have curated a detailed guide explaining what strategic tax planning entails and why it is important. To top it off, we will also take you through the 5 best strategies you can implement to save yourself from being more liable. 

What is tax planning in India?

Unlike most other countries, India offers numerous methods to help individuals reduce their tax liabilities. From exemptions to tax benefits, the rules are clearly stated in the annual financial and budgeting bills. That’s why strategic tax planning will help you efficiently manage your income and expenses without facing a financial crunch.

Take investment instruments as examples! Public Provident Fund and ELSS mutual funds allow investors to exempt a certain portion of the payable tax. Similarly, house loans and other types of income certificates can also offer tax benefits. Strategically planning these will help you lower the amount that you need to pay as part of your tax liability.

Why is tax planning essential in today’s economy?

Wondering how strategic tax planning will be beneficial for you, given the current economic conditions? Well, here’s the answer!

  1. Sections like 80C encourage individuals to invest in equity-linked and government-backed schemes. 
  2. For better budgeting capabilities and investment portfolio, one can strategically use the available resources and cut down the tax amount to be paid annually.
  3. Instruments like PPF and NPS help individuals create a better financial reserve for their retirement era, apart from saving taxes.
  4. Proactive and strategic tax planning will help you stay updated with the latest updates and laws concerning the economy and finance bills.
  5. Careful planning will help both individuals and businesses to reduce the payable tax amount without legal liabilities, ensuring higher net incomes.
  6. Most investments made for acquiring tax benefits will grow compounded with time, allowing you to boost your wealth accumulation.
  7. Planning will also reduce the worries concerning your finances, helping you avoid any type of burden later in the year.

Strategic tax planning: 5 facts you need to know

Knowing the accurate tax bracket

The Indian government has created different slabs based on the age categories and the income levels in terms of tax eligibility. So, strategic tax planning will start with understanding which bracket you fall into. If you are not clear about these brackets, you won’t be able to manage your finances efficiently. To help you understand it better, below we have listed a few benefits this knowledge will provide.

  1. You can distribute your earnings across multiple investment instruments easily without worrying about future finances.
  2. The knowledge about the tax bracket will influence your decisions regarding the tax benefits and deductions. 
  3. You can easily decide whether you want to fill up the ITR under the old regime or the new one. 
  4. There won’t be any legal liability due to overpayment or underpayment of the payable tax amount once you know which bracket you belong to based on your income and age.

Utilizing Section 80C deductions

This is one of the most preferred tools for strategic tax planning in India. Hindu undivided Families and individuals are eligible to claim tax deductions up to INR 1.5 lakhs annually through different investments described under Section 80C. In addition to helping reduce the taxable liabilities, these instruments will help you improve your investment portfolio and efficiently manage your finances. 

Below are some of the most common investment channels approved under this rule. 

  1. Employee’s Provident Fund 
  2. Public Provident Fund 
  3. Equity Linked Savings Scheme 
  4. Premiums paid towards Life Insurance schemes
  5. National Savings Certificate 

The more you diversify your investments, the better your wealth management capability will be. However, ensure to define yourself under the old tax regime to avail these benefits.

Investing in National Pension Schemes

NPS is a sponsored scheme under the Indian government that will allow you to legally exempt yourself from paying taxes. From allowing you to build a stable pension corpus to gain tax deduction benefits under Section 80CCD(1B), it will bring a lot of benefits to the table. Here are a few you should be aware of.

  1. It offers more flexibility to the investors than other government-backed schemes.
  2. You can exclusively save about INR 50,000 as a part of the payable tax amount.
  3. The NPS is a professionally managed fund, which will help you stay tension-free.
  4. You will also gain the facility of a partial period once the lock-in period is over.
  5. As it is an annuity scheme, you will receive a monthly pension post the retirement period.

Using home loan benefits

These credits are not just beneficial for asset creation but also for saving the annual tax. As per Section 24(b) defined under the Income Tax Act, salaried individuals can claim tax deductions up to INR 12 lakhs on the interest paid towards the home loan. That’s not all! Once you start repaying the principal amount, you will qualify for deductions under Section 80C.

Below is a brief overview of tax benefits for home loans.

  1. Section 24(b): Deduction of INR 2 lakhs for the interest you will pay throughout the tenure
  2. Section 80C:
    1. INR 1.5 lakhs tax exemption on the principal amount repaid
    2. Deduction of the registration fee and the stamp duty within the first year of purchase
  3. Section 80EEA: If eligible, first-time home buyers can save up to INR 1.5 lakhs per annum

Availing LTA and HRA exemptions

Both these options are allowable only for salaried employees in India. If structured correctly, they can help you reduce your overall tax liability to a great extent. Here’s how!

  1. Under Section 10(13A) of the Income Tax Act, three salary components will be exempted from the taxable slab. These are:
    1. The actual HRA amount credited to you every month.
    2. Rent paid, which will be 10% of the salary.
    3. 50% of the basic salary in metro cities and 40% in non-metro ones.
  2. Leave Travel Allowance or LTA will help you by:
    1. Covering the domestic travel expenses
    2. Offers claimable benefits twice in four years

Conclusion 

Whether it’s investing in the ELSS or getting a home loan, deductions and benefits can be availed through numerous channels. So, it’s evident that you need to be extremely skillful and capitalize on your smartness for strategic tax planning. But this is much easier said than done! At times, it can be extremely overwhelming, especially if you are not a pro in financial management. That’s why you can seek suggestions and advice from a professional like Wealth First. Their experts will help you build a strong investment portfolio with maximum tax benefits.