TAX PLANNING

TAX PLANNING

Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most tax-efficient manner possible.

Understanding what is tax planning is one of the most important aspect of financial planning. It is a practice where one analyzes his financial situation based on tax efficiency point of view so as to invest and utilize the resources optimally. Tax planning means reduction of tax liability by the way of exemptions, deductions and benefits.

Tax planning in India allows a taxpayer to make the best use of the various tax exemptions, deductions and benefits to minimize his tax liability every financial year. As responsible citizens of the country, paying Income Tax on time, on your income is mandatory for the country to grow.

Tax planning is a pivotal part of financial planning. Through effective tax planning all elements of the financial plan falls in place in the most efficient manner. This results in channelization of taxable income to different investment avenues thus relieving the individual of tax liability. The investment amount post lock-in can be utilized for fulfilling needs and act as the retirement corpus in most cases. All in all, the objective of tax planning is to reduce tax liability and attain economic stability.

Best Tax Saving Investments to Choose From

There are various sections in Income Tax Act, 1961, under which an individual tax payer can claim exemption, deductions and benefits. Some of the common ones for tax planning include Sec 80EE for interest on Housing Loan, Sec 80D for premium paid on mediclaim, Sec 80E for interest paid on Education Loan, etc. Amongst these, Sec 80C is the most popular offering plethora of tax saving investment options.

With various tax saving options on offer under Sec 80C, ELSS mutual funds is one which takes the cake as per financial pundits for two major reasons, (i) its equity based and (ii) it has the shortest lock-in period comparatively.

Another important parameter which makes it the most preferred investment option in India is, investments in ELSS can be made in small proportions through SIP instead of paying a heavy sum altogether. Thus an ELSS through SIP route is pragmatic and convenient for an investor who plans to save income tax in India.