Effectiveness of Tax Planning: Strategies to Lower Your Tax Burden

Systematic planning is essential when pursuing any goal, as it helps individuals achieve their targets efficiently. In the same way, tax planning might seem complicated, but it is a powerful tool to take control of your finances. Hence, tax planning allows you to save more while still fulfilling your tax obligations. In fact, the less you pay in taxes, the more you can invest in your future goals.

Tax planning involves organising your finances in a way that legally reduces your tax burden by utilising deductions, exemptions, and rebates provided by the government. This process enhances financial management, boosts savings, and helps build long-term wealth to tackle future uncertainties.

By understanding tax planning, you can ensure that your tax payments remain as low as legally possible while staying aligned with your financial objectives. This guide will provide you with the basics of tax planning, explain its importance, and offer smart strategies to help you save money and secure your future.

What are Taxes?

Taxes are mandatory financial charges imposed by governments on individuals or organizations to fund public services and infrastructure, such as roads, schools, and healthcare. There are two primary types of taxes: direct taxes and indirect taxes. Direct taxes are paid directly to the government by the individual or organization being taxed, such as income tax or property tax. Indirect taxes, on the other hand, are levied on goods and services and are paid by consumers, like sales tax or excise tax.

What is Tax Planning?

Tax planning denotes the plan of arranging your financial matters in a way that you have to pay as little tax as possible. It comes down to mapping out a way to pay as few taxes as possible without getting into legal trouble. Achieving this “goal” can be done in several ways, primarily by utilising the various types of exemptions, deductions, and rebates that the central and state governments provide.

Key Terms Explained

Tax Liability

Tax liability is the total amount of tax that an individual or business owes to the government based on their income and applicable tax rates. Understanding this amount is basic and necessary because it is an immediate and clear indicator of how much tax one has to pay.

Exemptions

The tax system is significantly influenced by exemptions, as they allow certain portions of income to be excluded from taxation. Besides, tax exemptions vary depending on factors like marital status, number of dependents, and specific allowances received. These exemptions can reduce the amount of income subject to tax, thus lowering the overall tax liability. However, these exemptions are not just influential, but they are important benefits provided by the tax system to help taxpayers under specific conditions, ultimately reducing their tax burden.

Deductions

Deductions help lower the taxable income even more. They are specific expenses that taxpayers are allowed to subtract from their total income to figure their adjusted gross income (AGI). These subtractions decrease the AGI and the overall tax bill. Some typical deductions are for home loan interest, student loan interest, and medical expenses.

Why Do We Need Tax Planning?

For several reasons, tax planning is important:

• It saves money: By planning in advance, you can minimise the amount you pay in taxs, which translates to more cash in your pocket.
• It aligns your investments with your financial goals: Whether you’re planning to buy a house or save for your kid’s education, tax planning helps ensure that your investments are working in alignment with those goals.
• It avoids the last-minute rush: If you plan well, you can avoid the scenario in which you’re desperately trying to figure out how to save even more money at the end of the fiscal year.

How to Plan Your Taxes Effectively?

Here are some straightforward steps to assist you with tax planning:

• Gauge Your Income: Make a prediction about your potential earnings for the year. For instance, if you anticipate your earnings will be ₹6,00,000, this estimate aids in understanding your tax liabilities.
• Understand Your Deductions: Get to know the parts of the Income Tax Act that can reduce your tax burden. To illustrate:
• Section 80C: Offers deductions for certain investments, including life insurance premiums, up to ₹1,50,000.
• Make Wise Investment Choices: Put your money in tax-saving vehicles that do more than just keep you from paying taxes; they should also be working to make you richer.
• Keep Pamphlets and Brochures Handy: Collect and store all literature related to your investments and expenses. Maintain it well. When half of the year is over, and it is time to catch up with your accountant, you will want to have all documents easily available.
• Look Over Your Tax Return (the one you already filed): Look it over carefully. This is the only chance you have left to make any sort of change to it, and you want to make sure it is perfect before getting on to next year.

Example of Deductions

Here’s a table summarising essential deductions under various sections:

To sum up, tax planning is more than a financial exercise; it is a skill that empowers you to secure your financial future, and it is of the utmost importance. It seems that many are not aware of the tax-saving potential that is at their disposal. Most seem to wait too long and fall victim to the seeming necessity of using a tax professional to get through.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.