Benefits of Tax Planning Rufino D'souza

This is the season when people run helter-skelter, in the lure of an investment that is tax efficient. But in this hara-kiri, do people find such an avenue to invest in?  Today, let us take some time to learn and understand the basic principles involved in finding out which investments really provide decent returns and are tax effective. In this post, we talk about the many Benefits of Tax Planning.

With the massive growth of the internet, it has become very easy to find information on areas of income-tax, tax planning or even on investments providing any sort of tax relief. But just as the saying goes, a little information can be dangerous, people tend to get lured into the glitz and glamour of products that are glorified either online or perhaps by a close relative or friend. Very few people tend to dig into the specifics of a said product. Is it long term?  Is it medium or short term? Can I defer the maturity? Does it provide me an inflation-adjusted return?

Most people feel the time consumed in asking and understanding the answers to these questions are rather stressful and a waste of productive time when they’d rather be doing something they consider more productive.

But it is in the understanding of those questions and their respective answers that make the difference between an Investor and an Informed Investor.

Benefits of Tax Planning

Any online website or search engine would tell you that income is taxable under 5 heads of income i.e. salary, business/profession, house property, capital gains and Other sources. But it would also tell you about the various sections, wherein lies the ability to reduce the taxable income, as these sections work as deductions.

One of these sections as per the Income Tax Act is the section 80/C. This section provides investment products, wherein investments made in some said products will enable you to reduce your Gross Taxable income, i.e. the combined total of the taxable income from all the above five mentioned sources of income. The limit of the section 80/C is currently Rs.1.5 lakh.

A professional investment advisor or even a chartered accountant will inform you of the various slabs of income under which the respective rates apply for the current financial year 2017-2018. These slabs apply to all resident Indians and are broadly prepared over two categories – Citizens below the age of 60 and above the age of 60. They are as follows –

ABOVE 60
INCOME RANGE	TAX RATE
0-300000	NIL
300000-500000	5%
500000-1000000	20%
ABOVE 1000000	30%

 

BELOW 60
INCOME RANGE	TAX RATE
0-250000	NIL
250000-500000	5%
500000-1000000	20%
ABOVE 1000000	30%

 

The slabs by themselves are rather self-explanatory, for e.g. if the annual income is below Rs.2.5 lakh for a person below 60 years and Rs.3 lakh for a person above 60 years, then these people are not liable to pay any income tax.

The others will pay tax on the portion of income within each slab, as per the rate applicable to the respective slab.

For ex. MR A has calculated his taxable income and he arrives at a figure of Rs.8,00,000.

Also, for the first Rs.2,50,000/- the Tax is NIL, Mr. A ends up paying tax on Rs.5,50,000/- as per the Tax slabs.

So Mr. A shall pay 5 % of the second slab i.e. on Rs.2.5 lakh and 20% on the remaining portion of income i.e. 20% on Rs. 3Lakhs.

Therefore Mr. A shall pay as Tax  – Rs.12,500(5% of Rs.2,50,000) + Rs.60,000(20% of Rs.3,00,000) = Rs.72,500 x 1.03 (educational cess)

As you would see the calculations seem rather difficult and obviously scary (Rs.70k plus tax!!)

But what if Mr. A takes the full benefit of section 80/C.? How much does he stand to save?

Let’s have a look…

If 80/c investments are done up to the extent of the maximum limit i.e. Rs.1,50,000

In this case Mr. A taxable income is reduced to Rs.8,00,000-Rs.1,50,000=Rs.6,50,000. Also, for the first Rs.2,50,000/- as the Tax is NIL, Mr. A ends up paying tax on Rs.4,00,000/- as per the Tax slabs.

So, his tax for the year would be

• 12,500( 5% of Rs.2,50,000) + Rs.30000(20% of Rs.1,50,000) = Rs.42,500 x 1.03 (cess)

Phew!! Now the numbers look a little less stressful, don’t they? And you will still not believe the fact that even though most Indians know that this is possible, yet they still do not consider making investments in section 80/c !! and even if they do so, it is because XYZ mentioned to invest here or there and they do so to save that additional income and not pay tax on it. However, at the same time, it is important to understand where this investment lies? In which product? What are the returns expected? Are the returns taxable? The time periods? Etc.

There are a plethora of ways and avenues to attain the perfect tax saving investment. Some of the Investments that can be made under 80/c are Life insurance, ELSS (equity linked saving schemes), infrastructure bonds, National savings certificates, Outstanding Principal on loan, PPF etc. (More details on 80/c investments in the next article) –  but you need to understand and determine which investment is most suited for you?

This is very specific to every individual and everyone can attain the desired investment if he or she asks and finds the answers to all these questions. Today’s investor does not want to remain uninformed or clueless about his or her investments. So let us all make a promise to ourselves that from now whatever tax-related savings we consider, we shall do the same in advance and prepare a designated plan to work towards it, rather than run everywhere at the last moment searching desperately for a tax saving plan and invest in the first thing we come across, without even knowing about the product. It is only after we base ourselves on the correct principles of investing do we get the answer to the question

To tax …? or not to Tax?  

(More details on 80/c investments in the next article)

Hope you enjoyed this article Benefits of Tax Planning.

Please read our earlier article Best Tax Saving Investments In India

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