Tax planning is not just paying less tax. The objective of tax planning is not to deprive the authority of their due revenue. Tax planning is associated with efficient management of taxes payable with the right knowledge of tax laws and rules and their applicability at the right place to draw the right strategy.
Evasion of tax liability is a temporary relief and can put the taxpayer into multiple liabilities in the future. But tax planning can save taxes in legal ways and result in more and more savings besides saving you tax.
Tax planning should be done ahead of earning the money. Tax management comes to play its role once the money is earned. Tax planning defines the right distribution of the earned money. It takes into account many factors like:
- Tax deducted/collected at source (TDS/TCS)
- Advance tax instalments
- Deductions and exemptions under the Income Tax framework
Sometimes it forces us to save on tax-saving instruments but that should not be the primary focus of the process. The focus is to reduce the tax liability within the legal framework by ensuring the application of correct tax strategies.
Often our tax planning begins and ends with Section 80 of the Income Tax Act, 1961. Many of us do not understand the head and tail of Section 80. To make many of our lives simple, the new tax regime has come. Now many of us face this question from the employer or the HR department at the beginning of the year – whether we go for the old tax regime or the new tax regime! We wonder! We often give them a reply without going into the depth of it.
Which regime is good for you?
Please understand that there are many provisions present under section 80 of the Income Tax Act, which can save your tax. For example: do you pay around Rs.25,000/- per annum towards a family floater Mediclaim policy? Claim deduction under section 80D. Do you pay Rs.30000/- in addition to the premium of the same or a different policy, as your elderly parents are also covered? Claim it too as a deduction. Are you paying EMI for an education loan taken for a dependant? Claim it under section 80E. Paying EMIs of a housing loan but your Rs.1.5L limit of 80C is exhausted? Do not forget to claim a deduction for the interest portion of it under section 80EE. Your dependant child has a nominal income from the return on investments and it is clubbed with your income? Claim exemption up to Rs. 1500/- per child from your taxable income under section 10(32) of the Income Tax Act. There are many such provisions to explore.
The old tax regime still saves you a lot of money if your taxable salary is above a certain limit. Also remember that if you have opted even for the new tax regime, you still have a few tax savings options – like your employer contributing to your National Pension System (NPS) or Atal Pension Yojana under section 80CCD(2). This is the same for both regimes.
A threshold limit of 7.5L including EPF, NPS and superannuation fund is exempt from tax payable by an employee, with effect from FY 2020-21.
If you opted for the new tax regime and your total annual income is up to 5L, you do not need to worry about income tax. But please do remember that total income does not mean salary alone. It means all kinds of earnings you have other than tax-free sources like gifts from close relatives or on wedding, inheritance or any other exempt income.
A little thought on tax planning will make your tax liability zero even if you have a total income of 8L in a year. In that case, you can opt for the old tax regime and claim the standard deduction on income from salaries and deductions under sections 80C, 80CCD(1B), 80D etc. Your employers’ contribution can add another diamond worth up to 7.5L on top of it every year.
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– Aditi Nundy