Tax Planning

Tax planning is a legal way of reducing your tax liabilities in a year. It will help you to utilize the tax exemptions, deductions, and benefits in the best possible way for minimizing your tax burden. However, it should be done in a legal manner.

Tax planning is the process of analysing a financial plan or a situation from a tax perspective. The objective of tax planning is to make sure there is tax efficiency.

With the help of tax planning, one can ensure that all elements of a financial plan can function together with maximum tax-efficiency. Tax planning is a significant component of a financial plan. Reducing tax liability and increasing the ability to make contributions towards retirement plans are critical for success.

Tax saving practices include tax avoidance, tax evasion and tax planning. Out of these tax planning is the only legal manner of reducing your tax liabilities. The government offers the different opportunities to save on taxes with the intention of reducing tax burden on a taxpayer through legal income tax planning methods.

Understanding Tax Planning

Tax planning plays an important role in the financial growth story of every individual as tax payments are compulsory for all individuals who fall under the IT bracket. With tax planning, one will be able to streamline his/her tax payments such that he or she will receive considerable returns over a specific period of time involving minimum risk. Also, effective tax planning will help in reducing a person’s tax liability.

Objectives of Tax Planning:

  • To minimise litigation: Minimizing litigation saves the taxpayer from legal liabilities.
  • To reduce tax liabilities: Every taxpayer wishes to reduce their tax burden and save money for their future. You can reduce your payable tax by arranging your investments within the various benefits offered under the Income Tax Act, 1961.
  • To leverage productivity: One of the core tax planning objectives is channelizing funds from taxable sources to different income-generating plans. This ensures optimal utilization of funds for productive causes.

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:

  • Its equity based
  • It has the shortest lock-in period comparatively.

Being market linked, ELSS are high on risk parameter however; they have the potential to offer impressive returns.

What are the Tax Implications On Mutual Funds?

The main objective of any investment is wealth creation. Mutual funds are efficient financial products that aid this objective through capital appreciation. Like all other investments, gains from mutual funds are taxable.

The tax you incur on mutual funds is based on the type of asset the fund focuses on and the holding period of your investment. However, a special kind of mutual fund–the equity-linked savings scheme or ELSS fund – can help you save taxes. ELSS mutual funds, though primarily invested in the stock market, are tax saving mutual funds. What sets ELSS apart from other equity oriented funds is the minimum lock-in period of three years.

Holding Periods:
The duration for which you hold on to your mutual fund investment is called the holding period. Short-term investments attract a tax rate different from long-term investments.

Snapshot: Taxation on mutual funds

Asset type Details Short-term capital gains Long-term capital gains
Equity funds Arbitrage funds Balanced funds (65%+ in domestic equity shares) Holding Period Up to 12 months Over 12 months
Tax Rate 15% 10%*
Debt funds International funds Fund of funds Holding Period Up to 36 months Over 36 months
Tax Rate Income Tax Slab Rate 20% after indexation
*Gains up to ₹1,00,000 per annum are tax-exempt.

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