Tax planning is an important aspect in one’s financial journey. Tax planning helps in maximizing savings to get tax benefit in a legal way. We all owe to government for tax payment. Therefore, it is very important to know our income tax liabilities and also ways to save or lessen these liabilities.
What is tax planning?
It is a process whereby an income earner invest his money in different financial products which are excluded from total income for tax purpose. The taxable income therefore comes down leading to reduced tax liabilities.
Most of the time we start looking at tax liabilities in the month of January, February and March or JFM as it is known. However, the best practice is to do tax planning right from the beginning of financial year and continue year on year. In fact it should be part of over all financial planning of an individual.
What are tax liabilities in India?
Currently, there are two tax regimes in India – old and new. The tax payer can choose any one.
The income slabs and applicable tax rate as per old regime are as below:
| Income slab (₹) | Applicable rates |
| 0.0-2.5 lakh | Nil |
| 2.5-5.00 lakh | 5% |
| 5.0-0 lakh | 20% |
| Above 10 lakh | 30% |
The income slabs and applicable tax rate as per new regime are as below:
| Income slab | Applicable rates |
| 0.0-2.5 lakh | Nil |
| 2.5-5.00 lakh | 5% |
| 5.0-7.5 lakh | 10% |
| 7.5 lakh – 10 lakh | 15% |
| 10 lakh –12.50 lakh | 20% |
| 12.5 lakh – 15 lakh | 25% |
| 15 lakh and above | 30% |
It is advisable to opt for old regime for high income earner, while new regime is suitable for income earner upto ₹15 lakh.
How tax is calculated ?
Say Mr.X earns an income of ₹20 lakh per annum. His tax liability will be calculated as below as per new tax regime:
| Income slab (₹) | Applicable rates | Tax calculation | Tax payable |
| 0.0-2.5 lakh | 0 | 2,50,000 X 0% | 0 |
| 2.5-5.00 lakh | 5% | 2,50,000 X 5% | 12500 |
| 5.0-7.5 lakh | 10% | 2,50,000 X 10% | 25000 |
| 7.5 lakh – 10 lakh | 15% | 2,50,000 X 15% | 37500 |
| 10 lakh – 12.50 lakh | 20% | 2,50,000 X 20% | 50000 |
| 12.5 lakh –15 lakh | 25% | 2,50,000 X 25% | 62500 |
| 15 lakh and above | 30% | 5,00,000 X 30% | 150000 |
| Total | 337500 |
This approach is known as progressive tax calculation.
A health and education cess @ 4% is applicable on the amount of tax to be paid. Further surcharge as below is applicable based on income level.
Applicable surcharge for old tax regime
- 10% of income tax, where total income is more than Rs.50 lakh and upto Rs.1 crore.
- 15% of income tax, where the total income exceeds Rs.1 crore.
Applicable surcharge for new tax regime
- 10% of Income tax if total income > Rs.50 lakh
- 15% of Income tax if total income > Rs.1 crore
- 25% of Income tax if total income > Rs.2 crore
- 37% of Income tax if total income > Rs.5 crore
Exemptions under Income Tax Act for tax planning
Though government is levying tax on income, it also giving certain exemption keeping in mind different income group in the society and also to encourage savings and investments.
Under Income Tax Act 1961, exemptions are given under following section to deduct such investment or expenditure from the total income for tax purpose.
Tax planning through investment eligible under section 80C
- Tax saving FD for 5 year
- Public Provident Fund
- Employee’s Provident Fund
- National Saving Certificate
- Unit Linked Investment Plan
- Equity Linked Saving Scheme or tax saving MF
- Sukanya Samridhi Yojana
- Senior Citizen Saving Scheme
- Post office Term Deposit
- Infrastructure bond of Govt. or corporate
Tax planning through payments eligible under section 80C
- Life insurance premium
- Children tuition fee
- Principal repayment of housing loan
If someone is not able to invest or spent which is eligible to cover under section 80C, may get exemption for following investment/expenditure under different sections of the Income Tax Act 1961.
| IT section | Description | limit |
| 80CCC | For amount deposited in annuity plan of LIC or any other insurer for a pension | — |
| 80CCD(1) | Employee’s contribution to NPS | 1.5 lakh |
| 80CCCD(2) | Employer’s contribution to NPS account | maximum upto 10% of salary |
| 80TTA(1) | Interest income from savings account | Maximum upto 10000 |
| 80TTB | Exemption of interest from banks, post office etc. (applicable for senior citizens) | Maximum upto 50000 |
| 80GG | Rent paid when HRA is not received from employer | Least of :
– Rent paid minus 10% of total income |
| 80E | Interest on education loan | Interest paid for a period of 8 years |
| 80EE | Interest on home loan for first time home owners | 50000 |
| 80CCG | Rajiv Gandhi Equity Scheme for investments in Equities | Lower of – 50% of amount invested in equity shares; or – Rs 25,000 |
As a part of tax planning we need to avail the above exemptions. The combined investment or expenditure under the above section is capped at ₹1.50 lakh. Apart from the above there are 3 (three) other avenues through which one can save tax beyond the threshold limit of ₹1.5 lakh. They are
- Additional investment in NPS upto ₹50,000 under section 80CCD(1B)
- Premium on Health insurance upto ₹25,000 & Rs.50,000 for senior citizen under section 80D
- 50% of donation or 10% of adjusted total income under section 80GG
These tax structure is applicable to all individual and HUF, proprietorship firm.
Tax planning example
Let us understand from above example of Mr.X how tax planning can help in reducing tax liabilities.
| Treatment for tax purpose | Applicable section | ||
| Income of Mr.X | 20,00,000 | ||
| Investment made under
– PPF – NPS |
25,000 1,00,000
|
To
be deducted from total income |
80 C |
| Expenditure incurred
– Life insurance premium – Children education |
13500 25000
|
Under 80C maximum deduction is Rs.1.50 lakh. With PFF, NPS & children education total investment add upto Rs.1.50 lakh. Therefore life insurance premium will excluded though it is eligible. | 80 C |
| – Donation | 10000
|
To
be deducted from total income to extent of 50%, because it is permitted over & above the maximum deduction of Rs.1.50 lakh under section 80C. |
80GG
80D 80D |
| – Medical insurance for self
– Medical insurance for parent (age above 60 year) |
25000
50000 |
To
be deducted from total income, because it is permitted over & above the maximum deduction of Rs.1.50 lakh under section 80C |
|
| Taxable income | 177000 | ||
| Tax to be paid | 268500 |
As compared to tax liability without investment/expenditure Mr.X saved ₹ 69000 ( ₹337500 – 268500) by making various tax eligible investments. This is the benefit of tax planning.
If it is a partnership firm, LLP or company than applicable tax rate will be 25% on the income earned during the year. However, they too can do tax planning and reduce their tax burden by booking expenditure on account of
1) travel & accommodation
2) marketing or brand building
3) Business utilities like telephone, vehicle, electricity etc.
4) engage family member as employee
5) Deduct Tax at source correctly
6) Providing appropriate depreciation on plant & machinery, building etc.
In case of companies, tax rate could be at rate of 15% to 25% if they opt for exemption under section 111BA, 111BAA, 111BAB.
Conclusion
Here only the important and generally applicable tax liabilities and available options for tax saving are highlighted. There are many other criteria and provision through which tax planning can be carried out and reduce tax liabilities. It may not be easy to calculate tax saving investment if your sources of income are multiple or if you fall in high income bracket or different category of income tax payer. It will therefore be advisable to take help of a tax expert to guide you correctly in tax planning.