What Is Tax Planning? Tax Savings Options, Benefits And Importance

As one financial year ends, the other one begins, one should take time and begin tax planning at the start of financial year. If you are wondering what is tax planning, you should continue reading further.

What is tax planning?
In simple words, it is a part of financial planning which helps in reducing the tax outgo and save more. It is a legal way of reducing your tax liabilities for that financial year. It helps you utilise the tax exemptions, deductions, and benefits offered by the government in the best possible way to minimise your liability and increase your savings.

In terms of definition tax planning is the analysis of one's financial situation from the tax efficiency point-of-view.

Importance of Tax planning
The main reason of tax planning is to save money and mitigate one's tax burden. As mentioned earlier, it is a major part of financial planning, which will help you in planning for your financial goal as per your dreams and needs. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961.

Tax planning requires you to consider timing of income, size, and timing of purchases, and planning for other expenditures. Also, the selection of investments and types of retirement plans must complement the tax filing status and deductions to create the best possible outcome.

Tax Savings Options In India
There are plethora of options available under various sections on Income tax act from which you can get tax exemptions.

If you have a medical insurance policy, premium paid for it can be claimed as a deduction up to Rs 25,000 for self and family under section 80D. Senior citizens can claim a deduction of upto Rs lakh for the same.

If you are paying an educational loan, you can claim the interest paid on an education loan as a deduction under section 80E. Similarly, if you were paying a home loan, under section 80EE a deduction of up to Rs. 50,000 on taxpayers' home loan interest that is over and above the limit of Section 24, subject to terms and conditions is allowed. Or under section 24, you can claim maximum deduction of upto Rs. 2 lakh in a financial year for the interest paid on the home loan.

Under sections 80GGA and 80G, for donations made towards rural development or scientific research and certain relief funds or charitable institutions can be claimed as a tax deduction.
Plus under section 80TTA a maximum deduction you can claim is of Rs 10,000 on income earned from deposits in a bank or post office.

Some companies even offer house rental agreement (HRA) as a part of your salary for the expenses incurred towards rented accommodation. So, you can claim HRA exemption only if you are residing in a rented house. HRA exemption is covered under Section 10(13A) along with rule 2A of the Income Tax Act, 1961.

However, here are 7 best investment options to choose from to save taxes:

1. National Pension Scheme (NPS)
A social security scheme launched by the central government to encourage individuals to invest in a pension account at regular intervals throughout their employment. It brings an attractive long term saving avenue to effectively plan your retirement through safe and regulated market-based return.

After retirement, subscribers can withdraw a portion of the corpus. It brings an attractive long term saving avenue to effectively plan your retirement through safe and regulated market-based return. It has a lock-in period that is locked till retirement.

The returns depend on the performance of the schemes. Contributions made to the NPS are eligible for tax deductions of upto Rs1.5 lakh in a FY under Section 80C of the I-T Act, and an additional Rs.50,000 (Tier 1 account) under subsection 80CCD (1B)

2. Tax-savings fixed deposits
You can save tax by investing in tax saver Fixed Deposits which can fetch you tax deduction under section 80C of the Indian Income Tax Act, 1961. You can claim a deduction of a maximum of Rs.1.5 lakh by investing in tax saver fixed deposits. There is a lock-in period of 5 years for such FDs and the interest earned is taxable. The rate of interest usually ranges from 5.5% - 7.75%.

3. National Savings Certificate (NSC)
They may appeal to conservative investors who hail from low-income tax slabs and do not want long-term commitments because it is launched by Government. It has a lock-in period of 5 years and offers a 7%rate of interest. National Savings Certificates are a savings bond scheme which encourages primarily to invest while saving on income tax under Section 80C. If you have a Savings account with a Post Office, you can buy NSC certificates in e-mode, provided you have access to internet banking. NSCs can be bought by an investor for self or on behalf of minor or with another adult as a joint account.

4. Equity Linked Saving Schemes (ELSS)
ELSS is an equity mutual fund that allows investors to invest in a diversified pool of stocks along with eligibility of tax deduction under Section 80C of the Income Tax Act.

Investments made in an ELSS will allow an individual or HUF a deduction from total income of up to Rs 1.5 lakhs per annum. Among plethora of various tax saving investment options available, ELSS has a lowest mandatory lock-in period of 3-years. Post the lock-in period investors can switch or redeem the units freely.

5. Unit Linked Insurance Plans (ULIPs)
ULIPs are long term investment products that allow you to choose equity funds, debt funds or both. ULIPs give you the flexibility to switch between funds in sync with your financial goals. By investing in ULIPs, you can save taxes under sections 80C and 10(10D) of the Income Tax Act, 1961.

6. Public Provident Fund (PPF)
Public Provident Scheme is a long term investment vehicle for saving tax and is helpful in creating a financial cushion post-retirement. The interest rate on the PPF balance is reset every quarter. For investing in a PPF, you need to open a PPF account at the post office or designated branches of public and private sector banks to start with. Investments made in the Public Provident Fund enjoys an 'EEE' status i.e. exempt, exempt, and exempt.

This means that the contribution made towards the PPF account, the interest earned and maturity proceeds are all tax exempted. Since it is a government backed product, it is considered to be one of the best tax-saving investments products.

Even though the interest rate on PPF keeps on changing the risk factor remains stable. PPF offers ease of investment as one can start contributing to a PPF account with a minimum amount of Rs.500 and can contribute up to a maximum of Rs 1.5 lakh in a year, under section 80C. It also offers the investors a choice to contribute either in monthly installments or a lump-sum amount. However, the maximum contribution of 12 installments is allowed in a year.

7.Sukanya Samriddhi Yojana (SSY)
Sukanya Samriddhi Yojana is also a government savings scheme launched to benefit girl child as part of the "Beti Bachao - Beti Padhao" initiative. It offers an interest rate of 7.6% and provides several tax advantages. The investments made in SSY are eligible for tax exemption up to the maximum limit of Rs.1.5 lakh under section 80C of the IT Act.

The annually compounded accrued interest is also eligible for tax exemption and the maturity proceeds and withdrawal amount are also tax exempted. One can open a Sukanya Samriddhi Yojana after the birth of a girl child till she turns 10 years old. The maturity period of SSY is 21 years from the account opening or upon the of the girl marriage after attaining 18 years. However, contributions have to be made for only 15 years.

Benefits of Tax Planning
Tax planning offers following benefits:
1. To reduce tax liability: You can reduce your payable tax by arranging your investments within the various benefits offered under the Income Tax Act, 1961. The Act offers many tax planning investment schemes that can significantly reduce your tax liability.

2. For productive investments: If you choose proper tax saving avenues, you can save more and choose to invest in avenues that will help you build wealth.

3. For growth of economy and stability: Taxpayers' money is devoted to the betterment of the country. Effective tax planning and management provide a healthy inflow of white money that results in the sound progress of the economy. This benefits both the citizens and the economy.

4. To minimize litigation: There is often friction between tax collectors and taxpayers as the former attempts to extract the maximum amount possible while the latter desires to keep their tax liability to a minimum. Minimising litigation saves the taxpayer from legal liabilities.

5. For better financial planning to achieve financial goals: If you plan well considering the tax implications, you will be able to set financial goals. To achieve your goals you will be adept in chalking out a thorough financial plan and achieve it.