Best Tax Planning Assistance
With the commencement of the last month of the financial year, the only thing people talk about is saving tax. Without proper knowledge or proper tax planning we directly jump into products like life insurance, fixed deposits of more than 5 years, public provident fund to save tax. Trust me, this is not tax saving, but these are bad financial decision. Tax Planning is more of proactive in nature. It is a process which needs to be performed every year. Any type of assessee, individual, HUF, Limited Liability Partnership, company needs to perform tax planning activity. Let us know some things about it.
It is an activity undertaken by an assessee so that he can reduce the tax liability in such a way that no provisions of law are violated. While doing tax planning all the allowances, deductions, exemptions, rebates are taken into consideration. A judicious and optimum use of all the benefits available under the law are utilized. As the provisions of law are not violated, tax planning is permitted. Most of the times it is seen that people hide their income and term this is tax planning. Well, this is tax evasion and is a crime. Activities like tax avoidance, tax evasion should not be confused with tax planning. Let us look at the difference between these terms.
1.) Tax Planning : It allows a tax payer to make best use of the provisions of the statue. Various deductions, exemptions, allowances are taken into consideration and optimum utilization of the same are made. For example, premium paid towards life insurance will be allowed as deduction under section 80C, this is tax planning.
2.) Tax Avoidance: It is a practice of managing your income in such a manner that assessee avoids paying tax to the government. Here the assessee makes use of the loopholes of the tax laws. Although, it is not as severe as tax evasion, but it defeats the purpose of law. While we can say that tax avoidance is legal, morally it is an unethical practice.
3.) Tax Evasion: Simply speaking, tax evasion is non payment or under payment of tax to the government. This involves misrepresentation or under reporting of income earned, claiming excess deduction which they are not entitled to claim legally. For example, claiming deduction of premium paid on life insurance without actual payment. This is tax evasion is not permitted by law and this attracts penalty.
1.) Reduced Tax Liability: An assessee can succeed in saving maximum amount tax by properly planning the investments which are allowable as deductions under the law. For example, let us assume that Mr. A has a gross total income of Rs. 12 lakhs and he has not planned his taxes. His tax liability as per normal tax rate will be Rs. 1,72,500. In this case, Mr. A has not invested his income in areas where deduction can be allowed to him. This is a case of poor tax planning.
If in the above case, Mr. A invests Rs. 1,50,000 in options available under Section 80C of income tax act, like life insurance premium, provident fund, PPF, Sukanya samridhi yojna, his tax liability will be Rs. 1,27,500. As you can see that tax liability is reduced by Rs. 45,000, which means reduced cash outflow of Rs.45000. At the same time, he need not worry about those Rs. 1,50,000 as they are invested in options such as, life insurance, fixed deposit, provident fund etc. which will provide you return or safety in future.
2.) Increased Investments: With proper tax planning we can place funds from our taxable income in such investments which will help us generate returns and at the same time give us security and assurance. Investment in instruments like provident fund, fixed deposits will fetch us a return of 6-8% per annum and investments like life insurance will provide security to our family. With proper tax planning, not only we can identify the amount to be allocated to investments, but we also develop a habit of investment.
3.) Growth of Economy: As taxes are planned, there is no need to hide income which in turn will result in growth of economy. As all the income is disclosed, it will be in circulation of banking system which will help in economic growth. Moreover, investments in various instruments to take the benefit of reduced taxes will help in economic prosperity by mobilizing funds towards infrastructure projects. Thus, by proper tax planning not only we can achieve the target of individual growth, but also, we contribute to the economic growth.
4.) Less Litigations: As a taxpayer we want to pay less tax, as it is a cash outflow for us. On the other hand, government wants to collect as much tax as possible. With proper planning, we will not be required to indulge in unlawful activities like tax avoidance or tax evasion. Thus, we will be able to save a huge amount of cash outflow without indulging into any unlawful activity thereby reducing the litigations and the amount and time spent on such litigations.
5.) Retirement Benefits: Premium paid towards life insurance, amount deposited in provident fund, PPF, investment in fixed deposits are made not to reap the benefits in near future, say 1-3 years. But they are made and locked in for a long period of time. Like life insurance is taken so as to protect our family in case of casualty. Similarly, investment in fixed deposit is locked in for 5 years, or in PPF is for 15 years which can be extended to further period of 5 years. As all these deductions are allowed only if lock-in is for a long time. This helps an individual plan his retirement and get the benefits of the same in case of retirement.
1.) Delay in Taking Action: For a large part of tax payer, a year seems to be a long time, and yes, it is. But with our busy schedule we tend to delay the process of tax planning. For a large number of people, it is a one-time activity. Once the tax planner has planned your taxes, they will continue it for foreseeable future. Believe me, it is not a one-off activity where we know the names of the products and amount to be invested in each of them so as to continue them for future years. But as the income will increase, so will the tax burden. For this, it is important for us to perform the activity of tax planning each and every year.
It is also seen that, in cases people will plan their taxes at regular intervals, but they will start the activity during the last month of the financial year. Again, this approach towards tax planning is not correct. People should start to assess their income from the beginning of the year and start investing accordingly without waiting till the last month.
2.) Investing Without Research: Frequently we run into sales person from various companies or banks who prepare and sale various financial products. When they highlight the benefits of the products, they mention that “this product is eligible for section 80C or section 80D deduction”. Knowing that this is eligible for deduction we get ready to buy the product and the next thing you know that the dotted lines on the agreement is signed and a cheque is prepared. But what we fail to do is read the policy document. Whatever we know about the product are just the bullet points, highlighting the key features of the product. But there are a lot of hidden points which are not told to us by the representatives and we also do not care to read the whole document. Our research is just limited to some benefits and deduction under section 80C. This is a huge mistake and people often find themselves cheated, who in fact, are to be blamed as they did not read the whole document. No matter what, make it a point to read the whole document before investing in any financial products.
3.) Lack of Knowledge: Lets agree to the point, tax planning is a complicated job. A lot of people think that it is just about section 80C, but this is not the case. As much as we would like to save our taxes and at the same time make investments in such instruments which would give us fixed returns and a sense of security, we also have to see that we are not investing in same instruments. For example, it should not be the case that we have bought more than one life insurance policy and most of the limit available to us under section 80C gets exhausted there. Same way we should also see that all our investments are not in fixed deposits or provident fund or PPF. The whole point of gathering knowledge is to not ending up investing in instruments which will have no value to us in long run.
4.) Lack of Awareness: I often come across people who would come to me to get their income tax return filed, or calculation and payment of advance tax, or other statutory compliances. And they have one thing in common, they come after the due date. Now, you might ask me what is the mistake in this, we can still file the income tax return or pay advance tax. Yes, you can but after paying a fine. One of the aspects of tax planning is saving cash outflow in the form of fines, penalties and interest. Like for delay in filing the income tax return, you will have to pay fine as required by the law. Along with that you will also be required to pay interest. If you fail to plan your taxes and result in omitting some income, or hiding some income, chances are that you will come under the radar of income tax department and, if found guilty, will result in heavy penalty.
1.) Identifying Your Total Income: As per the income tax act, your total income is divided into 5 heads, those are, salary, house property, profits and gains from business or profession, capital gains and income from other sources. If you are a salaried person, then you may have an estimate of your annual salary. You can take into account any increment given to you to estimate your annual salary. If you have any income from house property which you have let out, then you have an idea of annual rent which you will earn from the same. In case of capital gains, you can estimate the amount of capital gains from any transaction as and when the same will arise. People involved in any business or profession can estimate their income as per the mercantile system or cash system of accounting. Income from other sources can be identified as and when earned.
2.) Identifying Various Options for Tax Saving: Investing for saving tax is not just about section 80C. As a matter of fact, there are other sections in income tax which allows deduction to you. Like section 80D, which allows deduction on health insurance premium. Section 80C is a vast section, but what a common person know are just the ones which are more popular. A proper balance should be maintained between the amount invested and at the same time we have to look that investments are not redundant, i.e. investing in same products just with different companies. Also, cash requirements should be taken into consideration. Excess outflow of cash should be avoided.
3.) Becoming Aware about Statutory Dates: If you miss any due date, then this would attract penalties, fines, interest. For a person whose total income is around Rs. 5 lakhs, paying towards penalties and fines can be a huge amount. So, it is important for any person to be aware to due dates of filing return, or payment of advance tax or filing any other return.
Tax planning is not just about investing in options available under section 80C. It is an exercise which requires planning and taking into account, application of mind, risk appetite, disposable income. It is a process which should start right from the commencement of any financial year. It is always advised to hire a tax planner, who can take care of your tax planning activity in a professional manner and provide you with regular updates. A clear distinction should be made between tax planning, tax avoidance and tax evasion. As there is a fine line of difference between the three, your tax planner will help you identify them and can suggest you accordingly. For more information contact Planify.