The taxes you pay each year have the potential to make a significant impact on your earnings, but it’s not something that should be avoided because tax avoidance and evasion can lead to some big legal consequences. The best weapon in your arsenal against this impact is tax planning. In order to stay compliant one can use tax planning to legally reduce their tax liabilities while also maximising efficiency. In any given year, tax planning not only saves tax but also saves one from fines or penalties due to late or incorrect tax reporting. It is a long-term solution that allows you to take full advantage of the many tax benefits, exemptions, and deductions given in the Income Tax Act. Whether you are an individual taxpayer or run a business, there are many benefits of tax planning.
What Are the Benefits of Tax Planning?
Let’s take a look at the many advantages of tax planning in detail:
1. Lowering Tax Liability
Of course, every taxpayer wishes to minimise the amount of taxes they have to pay and retain more of their hard-earned money. One of the main goals of tax planning is to reduce the amount of tax one legally pays for a given year. This can be done by making use of the benefits, deductions, and exemptions in the Income Tax Act. For example, instead of investing your money in a simple fixed deposit, you can explore the option of investing in the Public Provident Fund. Both options have similar returns, but with PPF you can also claim a tax deduction of a maximum of Rs. 1.5 lakh in a year, according to Section 80C of the Income Tax Act.
2. Maximizing Tax Efficiency
As we said before, tax planning is a long-term solution, so it goes beyond just reducing taxes for the current year. Through tax planning, you can maximise tax efficiency by saving as much money as possible while also paying as little taxes as possible, every year. If you have a business, you can also increase the overall productivity through tax planning. This efficiency doesn’t just help one save more but also enhances financial stability. Let’s take an example – Another tax saving investment option under Section 80C is Equity Linked Saving Schemes.
ELSS is a type of mutual fund that invests heavily in equity, so the returns it offers are very attractive. It also has the shortest lock-in period of any tax-saving investment options, but it does come with a higher degree of risk. By investing in ELSS, you can not only save tax but also grow your wealth substantially, making it a very efficient option for people with a high-risk appetite and a long-term horizon.
3. Planning for Future Financial Goals
Another key advantage of tax planning is that it goes hand in hand with achieving your medium and long-term financial goals. With tax planning, you can save more money and then redirect the saved money into investments. These investments then help you realise your financial dreams. Whether it’s saving for retirement, funding your children’s education, or buying a home, tax planning can help you efficiently allocate your money in such a way that minimises your tax burden while maximising your savings and investments.
For example, if your goal is to build a corpus for your post-retirement life, you can look at Section 80C options such as the National Pension Scheme and Public Provident Fund. While PPF is suitable for any long term goal, NPS is a scheme that is specially designed to help people save for life after retirement.
If you want to buy a home, you can leverage Section 24(b) of the Income Tax Act. According to this section, you can get a maximum deduction of Rs. 2 lakh on the interest you pay on home loans.
If your goal is to protect yourself and your loved ones from unexpected and unfortunate events through comprehensive term and health insurance, you can save additional tax. Under Section 80C you can also claim tax deductions up to Rs. 1.5 lakh on premium paid on term insurance and Unit-Linked Insurance Plans (ULIP).
According to Section 80D, you can claim Rs. 25,000 on a health insurance premium that covers you, your partner, and your children. You can claim an additional Rs. 25,000 for your parents, and the limit rises to Rs. 50,000 if they are senior citizens.
Tax planning thus plays a big role in your overall financial planning. Before you do your goal-based planning, you should be aware of the tax implications of your options.
Also Read: Tax Planning For Beginners in India
4. Enhancing Cash Flow
If you run a business, a big advantage of tax planning is that it improves your business’s cash flow. Cash flow is the movement of money in and out of your company, which includes income, expenses, and investments. Tax planning optimises the timing of income and expenses, maximises tax deductions, and minimises tax liabilities.
It allows you to strategically restructure your business transactions in such a way that it can take maximum advantage of the tax incentives available, so you can effectively manage your cash flow and make sure there is sufficient liquidity to meet your daily operational needs and grow your business.
5. Minimizing Risk and Compliance Issues
Through proper tax planning, you can make sure that you fulfil your tax obligations accurately and on time, without underreporting income or omission of assets. Underreporting income and assets can lead to hefty fines and serious legal consequences so tax planning can prevent any such trouble. It also enables you to pay taxes on time, which further helps you avoid the penalties associated with late filing.
Doing tax planning from the start also saves you the headache of having to haphazardly file your taxes at the last minute and you can simply do it without any anxiety. This allows you to reduce the errors associated with documentation and do the filing properly so you won’t have to take stress about any litigation from the tax authorities. It also enables you to easily claim deductions at the time of filing and you can get refunds if applicable much quicker.
Also Read: Best Tax Saving Investment Plans & Schemes for FY 2024-25
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6. Working with Tax Professionals
To take full advantage of the benefits of tax planning, individuals and especially business owners should consider consulting with a tax planner. With so many intricacies, the world of tax can be hard to master, so it can be a wise move to seek professional expertise. A tax planner can help you leverage these benefits and more.
You can save a lot of valuable time and effort while also enjoying the peace of mind that comes with having an expert guide by your side. A professional can also recommend to you the most suitable investment options to save tax as per your risk tolerance, financial goals, and time horizon, and keep you updated on the changes in laws.
Conclusion
The benefits of tax planning are too good and too many to ignore. Paying the fair share of taxes is the right thing to do, but the government has also given you many options to reduce the amount you have to pay. Tax planning can help you take advantage of the deductions and exemptions in the Income Tax Act and minimise your tax liabilities, improve efficiency, enhance your business’s cash flow, keep you compliant, and minimise the risk of litigation and penalties.
It plays a huge role in financial planning, as it helps one to fully understand the tax implications of the investment options available to them. Through tax planning, you won’t just save more money but also be able to invest more and reach your goals faster. This is a journey best planned early because that way you can maximise tax efficiency.
