Personal Tax Planning

Introduction: Money holds great significance in the life of an individual. It has the power to
transform the living standards of people provided one possesses the skills required to manage it
effectively. One of the essential requirements for efficient money managements is tax planning.
Without efficient tax planning, no matter how good your earning is, they can get eroded easily. Tax
planning is not just restricted to individuals, organizations to require planning their operations and
investments in a manner so that their tax liability can be minimized.

Tax and its Importance: People mostly consider tax as a liability, a burden. On the contrary,
it is the duty of every citizen towards their country. It is a cost for the facilities used by us
and provided by the government to make our lives easier and to help us earn money for a
livelihood. And needless to mention, it is one of the most important sources of revenue for
the government. If we do not pay tax on income earned, it will directly impact the revenue
stream of the government, which will get handicapped, resulting in a halt in the growth of
the economy. Hence, we all must pay our due share of tax and payment must be done on
time.

Thus, the primary objective of tax planning is to save the hard labour of the taxpayer in enjoying the
fruits of his income and wealth to the maximum possible extent.

Methods commonly used by taxpayer to minimize tax liability:

 Tax Planning
 Tax avoidance
 Tax evasion

Tax Planning: Tax planning can be defined as the adoption of legalized ways of reducing tax liability
in a given financial year. It aims to maximize all genuinely permissible deductions, exemptions,
allowances, and rebates on behalf of the taxpayer in order to minimize their tax payment.

Tax planning is a crucial element of financial planning. All components of the financial strategy are
put into places most effectively through proper tax planning. As a result, taxable income is
distributed to other investment opportunities, freeing the individual of tax obligations. The
investment amount after lock in can be used to meet necessities and in most circumstances, serves
as a retirement fund. Overall, reducing tax liability and achieving economic stability are the goals of
tax planning.

Types of Tax Planning: The tax planning can be classified as Follows:

 Short-Term Tax Planning: Short term tax planning mainly focuses on minimizing tax liability
for a particular fiscal year. Normally, tax planning is done at the end of the fiscal year to avail
the advantages of deductions and exemptions under applicable tax laws.
 Long-Term Tax Planning: Long term tax planning is done from the beginning of the fiscal
year. There are chances that its benefit might not be available immediately, but it is
beneficial in the long run.
  Permissive Tax Planning: Permissive tax planning involves taking the advantage of the tax-
saving options offered by an individual’s country’s taxation laws. Like India, the income tax
Act, 1961 offers various tax saving investment options under section 80C. Planning one’s tax
by using the benefit offered under this applicable law is permissive tax planning.
 Purposive Tax Planning: Under purposive tax planning an individual takes the necessary
actions with the specific purpose of ensuring maximum benefit by selecting the appropriate
investment liquidation timing of diversification in the case of businesses, etc.

How to get started with tax planning: An Individual who is new to tax planning can enter into the
habit of it by following the below process:

 Correct assessment of monthly or annual income

 Evaluate the part of income which is taxable
 Make use of deductions to reduce the total taxable income
 Invest in tax-saving instruments
 Go for professional help

Tax Avoidance: Tax avoidance is minimising the incidence of tax by adjusting the affairs in such a
manner that although it is within the four corners of taxation law, the advantages are taken by
finding out the loopholes in the law. The shortest definition of tax avoidance is that is the art of
dodging tax without breaking the law. Typically, this is done by utilizing all permitted deductions and
credits. It can also be done by giving tax-beneficial investments a higher priority such as purchasing
tax-free municipal bonds. Tax evasion, which relies on unethical practices like fabricating deductions
and underreporting income, is not synonymous with tax avoidance.

Tax Evasion: Tax evasion is when a person or business intentionally avoids paying their fair share of
taxes. It entails faking or disguising income, inflating deductions without supporting documentation,
not disclosing cash transactions, etc. Tax evasion is a serious crime that carries harsh punishments
and criminal prosecution.

Way of tax Evasion:

 Failing to make the required payment

 Smuggling
 False tax returns
 False financial statements
 Using False Documentation to claim exemption
 Not declaring income
 Bribery
 Keeping Money abroad
Difference between tax planning and tax evasion:

Tax planning Tax evasion

1. Tax planning is an act within permissible range Tax evasion is an attempt to avoid tax by
of the act conducted to achieve social and misrepresentation of facts and falsification of
economic benefits accounts.

2. Tax planning is a legal right which enables the Tax evasion is a legal offence which may lead to
taxpayer to achieve social and economic penalty and prosecution
objectives.

3. Tax planning accelerates development of the Tax evasion retards the development of the
economy of a country by generating funds for economy of a country by generating black money
investment in desired sectors which works as a parallel economy.

4. Tax planning promotes professionalism and Tax evasion encourages bribery and weakens the
strengthens the economic and political economic and political situation of the country
situation of the country.

Difference between tax avoidance and tax evasion:

Tax avoidance Tax evasion

1. Tax avoidance means planning for legal Tax evasion means avoiding tax liability illegally.
requirements but it defeats the basic intention of
the legislature.

2. Tax avoidance takes into account various lacunas Tax evasion involves use of unfair means.
of law.

3. Tax avoidance is lawful but involves the element Tax evasion is unlawful
of mala fide intention

4. Tax avoidance is planning before the actual Tax evasion involves avoidance of payment of tax
liability for tax comes into existence after the liability of tax has arisen

Taxation System in India: India has a systematic and structure taxation system. It has a three-tier
federal structure which consists of the central government at the highest tier followed by the state
government and and lastly local government bodies like municipals and panchayats. The duties and
responsibilities concerning taxation are distributed among the three. The central government is
responsible to impose taxes such as income tax, service tax, custom duty and central excise duty.
The state government imposes agriculture tax, professional tax, state excise duty, land revenue and
stamp duty. The local bodies are allowed to charge octroi, property tax and taxes on services like
water and drainage.
Types of Taxes: The two main types of taxes in India are those levied by the central and state
governments:

 Direct Taxes
 Indirect Taxes

Direct Tax: In India, direct taxes are taken out of the paycheck of the tax payer. The earning
party, whether an individual or business is accountable for depositing the direct tax liability.
They are the non-transferable taxes i.e. the one on whom the tax liability is levied is required to
pay it directly to the government. It includes taxes like income tax. Corporate tax, capital gain
tax, wealth tax etc. Central Board of Direct Taxes (CBDT) is the governing authority for all types
of direct taxes.

Following are the types of direct taxes which are levied around the world:

 Income Tax
 Corporate Tax
 Wealth Tax
 Capital Gains Tax

Note that in India, Income tax, corporate tax and capital gain tax are all governed under
Income Tax Act 1961.

Indirect Tax: In india, Indirect taxes are governed and administered by the Central Board of Indirect
Taxes and Customs (CBICI). Indirect tax is not directly paid by the taxpayer to the government, rather
it is taken out of their expenses i.e., they are transferable taxes and the liability to deposit the tax
with the government is shifted to the other party. Corporate entities and enterprises that offer
services and goods are primarily responsible for collecting indirect taxes.

Following are the types of indirect taxed charges on the consumers:

 Service tax
 Value added Tax
 Custom duty
 Excise Duty
 Octroi

Income Tax: It is the tax which is levied by the government on the income earned by the taxpayer
i.e. individual. The tax liability varies according to the level of income earned.

Taxation Terminologies :

 Assessee
 Previous Year
 Assessement Year
  Gross Total Income
 Net Taxable Income

Heads of Income Tax: According to income Tax Act 1961, a taxpayer’s income is classified under 5 heads. Correct
classification of the head after the end of the financial year is necessary condition for the correct calculation of Income tax

 Income from Salary

 Income from House Property
 Income From Profits and Gains from Business and Profession
 Income from Capital Gains
 Income from Other Sources

Taxation slabs: In india, the tax is levied on taxpayers through the slab system. Under the slab system, different tax rates
are assigned for different level of income.

Below are the slab rates (Under the old regime) for individual taxpayers belonging to different age categories:

FY 22-23 a nd AY 23-24

Resident Non-
Resident
Tax Rates Below 60 Years 60 to 80 Years Above 80 Years

Nil Upto Upto Upto Upto

2,50,000/- 3,00,000 5,00,000
2,50,000

5% 2,50,000 to 3,00,000 to 5,00,000 NA 2,50,000 to

5,00,000 5,00,000

20% 5,00,000 to 5,00,000 to 10,00,000 5,00,000 to 10,00,000 5,00,000 to

10,00,000 10,00,000

30% Above Above Above Above

10,00,000 10,00,000 10,00,000
10,00,000

New Tax Regime: A new system under section 115BAC is introduced in the Budget. For revenue earned
beginning on April 1, 2020 (FY 2020-21) which corresponds to AY 2021-2022, the new system is applicable.

Slab rates under the new regime are given below:

FY 22-23 and AY 22-23

New Slab Rates

Upto 2,50,000 Nil

2,50,000 to 5,00,000 5%

5,00,000 to 7,50,000 10%

7,50,000 to 10,00,000 15%

 10,00,000 to 1,25,0000 20%

1,25,0000 to 15,00,000 25%

15,00,000 30%

Old VS New Regime: Which is better?

The choice of which regime to adopt is totally upon the taxpayer depending on his/her financial planning.
However, it is generally said that if the taxpayer belongs to the-income category and has not made required
arrangements concerning investment and tax planning (low tax saving investments), it is preferable to opt for the
old tax regime because the new regime offers seven low-income tax slabs which can reduce the tax liability of the
taxpayer irrespective of non-availability of majority deductions.

In the case of individuals with higher income and who are active in investment and tax planning, they are advised
to opt for the old regime as it offers various deductions which can benefit the taxpayer by reducing the tax
liability to a great extent.

Deductions and Exemptions:

EXEMPTION: An exemption is part of gross income which is tax-free i.e., such value is
excluded in the process of calculation of gross total income. They generally included
allowances and other income. They can be partially tax-free or fully tax-free.
In the case of exemption, the amount of exemption is not at all included in the calculation of
the gross total income.

DEDUCTION: A deduction is a certain amount which is allowed to be reduced from the

income earned by an individual during the previous year in order to arrive at the taxable
income. It mostly included expenses or payments made in the name of investments.

In the case of deduction, first, the income from all different sources is added together to
arrive at gross total income. Then the deduction is allowed as per the rules applicable.

Exemption vs. Deduction

The table below provided the differences between exemption and deduction.
Basis Exemption Deduction

What is it? Relaxation Concession

Part of gross total Income No Yes

Aim To help the weaker section of To promote saving and

society investment activity among
taxpayers

Sections Section 10 Section 80C to 80U

Subject to conditions No Yes

Allowed to All the taxpayers Specific Taxpayers