Tax Planning

Every tax payer knows the toll that paying taxes puts on their financial income. To minimize this impact, tax planning is essential and needs to be done wisely. Tax Planning helps you to smartly invest in savings instruments, thereby offering combined benefits of investment growth as well as reduction in the amount of taxes paid to the Government.

Amongst the popular tax savings instruments available in the market, investing in a life insurance policy is considered a good option given the benefit it offers to its beneficiry in the form of – income protection, extensive life cover, reduction in the amount of tax paid. According to the Income Tax Act of 1961, life insurance policy holders are eligible to avail tax benefits.

Several life insurers, such as Max Life Insurance offers life insurance policies as well as specialized tax saving policy. These plans are best for protection, long-term savings, and of course, tax planning. Come March and we see people frantically stress over tax payments. This is when we get tax-related work done, like investing in tax-saving instruments, getting the right forms from insurance companies and actually filing our taxes. Naturally, it is only then that we realise exactly how much we owe as taxes. In the face of a big tax payment, we desperately search for solutions—anything to save money! But wouldn’t it be much better to have a handle on tax long before it’s time to pay it? And wouldn’t we absolutely love to pay a little less on tax than we do?

Suppose you earn Rs 5 lakh a year and your income tax liability amounts to Rs 23,690. That is a large amount! Now suppose you invest Rs 1.5 lakh—i.e. 30% of your total income—in tax-saving instruments. You can bring down your income tax liability to Rs 10,000—a 57.7% reduction. Imagine all you can do with the money saved!

It is for this reason that you need tax planning.

Deduction benefit

This refers to the deductions done towards payment of premium for life insurance policies. Under section 80c of the Income Tax Act, benefits over deductions are available to individual and members of Hindu Undivided Family. Under this section, premium paid during the tenure of the policy are eligible for tax savings. In this case, the policy is required to be availed in the name of the individual, his/her spouse, or children.

Such deduction is allowed only for premium amount that is valued up to a maximum of 10% of the total sum insured of the policy that is issued on or after April 1, 2012. In case the policy is issued before March 31, 2012, then deduction will be allowed on premium payment of up to maximum of 20% of the sum insured amount.

According to Section 80C of the Income Tax Act, such benefit can only be availed on investments made up to Rs. 1,50,000in life insurance products.

Under Section 80CCC

Deductions are available only on pension plans – a specialized form of life insurance policies. This section allows deductions for premiums paid towards the scheme for up to the maximum amount of Rs. 1,50,000.

Under Section 80DD

Premium paid for policy availed in the name of disabled dependent is eligible for deduction amount of up to Rs. 75,000 each year. In case of severe disability, higher deduction amount of Rs. 1,25,000 is permissible.

Under Section 80D

Income tax benefit is available to an individual or a member of a Hindu Undivided Family. This deduction is also available for policy availed in the name of individual, his/her spouse, and dependent children. Deduction benefit is available on amount of up to Rs. 25,000. An additional deduction benefit of Rs. 25,000 is available if the policy is availed in the name of parents. For parents, if they are senior citizens, higher deduction amount of Rs. 50,000 is permitted.

Exemption Benefit

With this benefit, any form of sum received through a life insurance policy is exempted from taxation.

Under Section 10(10D)

Sum received under a life insurance policy will be exempt from tax. This also includes any amount received through the policy in the form of bonus, or Section 80DD(3), or 80DDA.

Tax planning is a logical analysis of your income and expenditure, which helps you to invest optimally so you can save money when paying taxes. Quite simply, this process enables you to think about your tax payments right at the start of the year, rather than keep it for the eleventh hour. The aim of tax planning is, thus, to manage your money in such a way that you reduce the amount you pay as tax.

Here are the steps of the tax planning process:

  1. First take into account your total income. This is simply the starting point of the process and involves doing an honest and accurate calculation of your annual and monthly income.
     
  2. See exactly how much of it is taxable. Your entire take-home pay is not taxable. Some parts of your salary, like allowances for house rent or travel, are not taxable. On the other hand, any profit you make from your investments could add to your taxable income. Thus, understanding your actual taxable income is a must.
     
  3. Avail deductions to reduce your total taxable income. This can be done through structuring your salary and planning your investments right. For example, profits from a debt fund held for over three years is taxed at 20% after indexation. Interest from a fixed deposit, on the other hand, is taxed at the same rate as your income tax. So if you fall in the 30% bracket, debt funds may be a more tax-friendly option for you.
     
  4. Lastly, invest some money in tax-saving instruments. For this, you will need to read up on Section 80 of the Income Tax Act. This mentions all tax-related rules. There are many investment options that are available for effective tax planning like Provident Public Fund (PPF), Equity Linked Saving Schemes (ELSS) or National Saving Certificates (NSC). Even your life insurance , health insurance and home loan payments can help you avail tax savings.

All you need is a simple understanding of your own income and some basic tax rules; this little effort can go a long way in ensuring your overall financial security. Unfortunately, given the hustle and bustle of everyday life, not enough of us find the time to do this. But now that you know how important it is, we hope you will find the time!