Income Tax Planning

What Is the Importance of Income Tax Planning?

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‘Tax’ is a scary word. Nobody enjoys paying tax, as it is a mandatory contribution. People believe that paying taxes is a waste of their hard-earned money since it never seems to reach the intended recipients. The more money you earn, the higher your tax bracket. Despite saying that, there are numerous tax-saving strategies available. Of course, a layperson cannot be expected to grasp all the tax regulations. However, if the tax savings are significant, income tax planning is essential.

Income Tax Planning in India

The Government of India has released a list of tax deductions that any individual can use to save money on taxes. It is prudent to claim the following deductions:

  • Allowable deductions under Sections 80C to 80U of the Income Tax Act, 1961
  • The deductions aid in minimizing tax obligations that would have been taken straight from the taxpayer’s income in the absence of the deductions.
  • Along with tax deductions, tax credits are available for environmentally responsible actions.

Advantages of Income Tax Planning for Corporate Bodies

Tax preparation has several significant advantages for any firm, large or small. It entails assessing the business’s present financial status, forecasting potential profit or loss for the coming quarter, and developing methods for minimizing tax while increasing its worth.

  • The primary goal of income tax planning is to minimize your business’s tax liability by maximizing its deductible expenses.
  • By being aware of your tax responsibilities, you can reinvest funds that would have been designated for tax purposes elsewhere in your organization.
  • Income tax planning provides an excellent chance to consider the possibilities available to your firm and fine-tune its plans in all areas as we thoroughly analyze its data.
  • The sooner you begin in the fiscal year, the more tactics you can implement to maximize the impact of your tax preparation.
  • For firms that operate via a trust, income tax planning gives an accurate estimate of the trust distribution in advance, preventing you from having to choose in a hurry.

Corporate tax planning includes identifying strategies for minimizing a company’s tax payments. The simplest way to accomplish this is to account for employee health insurance costs, office expenditures, business transportation, employee child care costs, charity contributions, and retirement planning, among other things.

Need and Importance of Income Tax Planning

When an employer pays the group health insurance premiums on behalf of its employees, this is considered a business expenditure. This cost must be recorded in the company’s ‘profit and loss account’ before it qualifies for tax advantages under the Income-tax Act 1961.

Typically, employees do not qualify for tax advantage since their employer pays the whole premium for group health insurance.

However, under certain circumstances, employees may be eligible for tax advantages under section 80D of the Income Tax Act 1961. It is important to remember that the tax advantage varies according to the percentage of the premium paid by the employee.

The following are three instances in which an employee may be eligible for tax benefits:

  • When an employee pays the whole premium, the employee is the sole person entitled to the tax advantage.
  • When the employer pays the bulk of the premium, and the employee pays the remainder, the employee receives tax advantages based on their portion of the payment.
  • Whenever the employer pays a full premium, and the employee pays the extra premium by purchasing a top-up plan to increase the policy’s total coverage, the employee is allowed to claim a tax deduction for the portion of the premium paid by the employee.

Advantages of Income Tax Planning for Individuals

This word applies to the deduction made toward the payment of life insurance premiums. Individuals and members of Hindu Undivided Family are eligible for advantages over deductions under Section 80C of the Income Tax Act. Premiums paid during the policy’s term are tax-deductible under this provision. 

According to Section 80C of the Income Tax Act, this advantage is available only on investments in life insurance products worth up to Rs. 1,50,000.

Section 80CCC

Deductions are only possible on pension plans, a type of life insurance policy. This clause provides deductions for premiums paid to the program up to a maximum of Rs. 1,50,000.

Section 80D

Individuals or members of HUF are eligible for income tax benefits. This deduction is also available for policies purchased in the individual’s name and the names of their spouse and dependent children. Amounts up to Rs. 20,000 are deductible. If the insurance is taken out in the name of the parents, an extra deduction advantage of Rs. 20,000 is available. If parents are elderly citizens, a larger deduction of Rs. 50,000 is allowed.

Section 80DD

Each year, premiums paid for policies taken out in the name of a disabled dependent are entitled to a deduction of up to Rs. 70,000. In the event of serious impairment, a larger deduction of Rs. 1,20,000 is allowable.

What Is the Importance of Income Tax Planning in India?

Income tax planning has several key aims. Income tax planning reduces an assessee’s tax burden by organizing their financial activities under tax choices. Additionally, it complies with applicable tax rules, decreasing the likelihood of a lawsuit. One of the primary advantages of income tax planning is that the proceeds may be invested. It is the most efficient strategy to make prudent investments while maximizing the resources available to you from tax benefits.

Conclusion

Every taxpayer is aware of the financial toll that paying taxes has on their financial well-being. To mitigate this effect, tax preparation is critical and must be done prudently. Income tax planning enables you to invest prudently in savings vehicles, therefore combining the benefits of investment growth with tax savings.
Many life insurers, such as Vital, provide life insurance and specialist tax-saving options. These are the most advantageous programs for asset protection, long-term savings, and, of course, income tax planning.

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