“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold” –
–Kalidas in Raghuvansh eulogizing KING DALIP.
In India, the system of direct taxation as it is known today has been in force in one form or another even from ancient times. The origin of the word “Tax” is from “Taxation” which means an estimate.
Brief History of Income Tax in India: In India, this tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments.
In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India and Sikkim (including Jammu and Kashmir).
Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Union Budget every year.
Components of Financial and Money market in India
Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as Central Board of Direct Taxes (CBDT) constituted under the Central Board of Revenue Act, 1963.
The major tax enactment in India is the Income Tax Act, 1961 passed by the Parliament, which imposes a tax on the income of persons.
This Act imposes a tax on income under the following five heads:
I. Income from salaries
II. Income from business and profession
III. Income in the form of capital gains
IV. Income from house property
V. Income from other sources
In Terms of the Income Tax Act, 1961, a person includes
IV. Association of Persons (AOP)
V. Hindu Undivided Family (HUF)
VI. Body of Individuals (BOI)
VII. Local authority
VIII. Artificial Judicial person not falling in any of the preceding categories
Why are Taxes Imposed?
Everybody is obliged by law to pay taxes. Total Tax money goes to government exchequer. Appointed government decides that how are taxes being spent and how the budget is organized.
Tax payment is not optional; an individual has to pay tax if his/her incoming is coming under the income tax slab. It is a duty of every citizen to pay taxes. More collection of tax allows the government to launch more and more welfare schemes.
Why do we pay taxes?
- HELPS BUILD THE NATION
The cost of running an entire country, especially one that is as large and populated as ours, is humongous. It is through the taxes we pay that the government can perform civil operations. In other words, without taxes, it would be impossible for the government to run the country.
Income tax is one of the biggest sources of income for the Indian government. If people start thinking that income tax is a burden and avoid paying the same, it will directly impact the growth of our nation and also result in social collapse.
- WELFARE SCHEMES
There are currently more than 50 union government schemes in India. From employment programs, subsidy on home loans, concession on cooking gas, to pension schemes, the government has launched several schemes to help all the different sectors of the society.
These schemes benefit millions of Indians and require crores of rupees to run successfully. By paying income tax, you play your role in the success of these schemes and also provide the government with the ability to work on more welfare schemes and programs.
- IMPROVED HEALTHCARE AND EDUCATION
A significant chunk of the collected taxes is spent on improving healthcare in the country. There are government hospitals that offer medical services without any cost or at minimum cost. Over the years, the quality of service provided by government hospitals has improved by leaps and bounds, and it has only happened because of taxpayers paying tax.
Similarly, there are government schools with a negligible fee. Moreover, thousands of crores are also spent every year on defence and infrastructure developments. All of this ultimately helps in making the country more powerful and prosperous.
What is Tax Planning?
Taxes can eat into your annual earnings. To counter this, tax planning is a legitimate way of reducing your tax liabilities in any given financial year. It helps you utilize the tax exemptions, deductions, and benefits offered by the authorities in the best possible way to minimize your liability.
The definition of tax planning is quite simple. It is the analysis of one’s financial situation from the tax efficiency point-of-view.
Objectives of Tax Planning
Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961. The primary concept of tax planning is to save money and mitigate one’s tax burden. However, this is not its sole objective.
Advantages of tax planning:
To minimise litigation: To litigate is to resolve tax disputes with local, federal, state, or foreign tax authorities. There is often friction between tax collectors and taxpayers as the former attempts to extract the maximum amount possible while the latter desires to keep their tax liability to a minimum. Minimising 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. The Act offers many tax planning investment schemes that can significantly reduce your tax liability.
To ensure economic stability: Taxpayers’ money is devoted to the betterment of the country. Effective tax planning and management provide a healthy inflow of white money that results in the sound progress of the economy. This benefits both the citizens and the economy.
To leverage productivity: One of the core tax planning objectives is channelising funds from taxable sources to different income-generating plans. This ensures optimal utilisation of funds for productive causes.
Types of Tax Planning
Most people merely perceive tax planning as a process that helps them reduce their tax liabilities. However, it is also about investing in the right securities at the right time to achieve your financial goals.
Following are some of the various methods of tax planning:
Short-range tax planning
Under this method, tax planning is thought of and executed at the end of the fiscal year. Investors resort to this planning in an attempt to search for ways to limit their tax liability legally when the financial year comes to an end. This method does not partake long-term commitments. However, it can still promote substantial tax savings.
Long-term tax planning
This plan is chalked out at the beginning of the fiscal and the taxpayer follows this plan throughout the year. Unlike short-range tax planning, you might not be offered with immediate tax benefits but it can prove useful in the long run.
Permissive tax planning
This method involves planning under various provisions of the Indian taxation laws. Tax planning in India offers several provisions such as deductions, exemptions, contributions, and incentives. For instance, Section 80C of the Income Tax Act, 1961, offers several types of deductions on various tax-saving instruments.
Purposive tax planning
Purposive tax planning involves using tax-saver instruments with a specific purpose in mind. This ensures that you obtain optimal benefits from your investments. This includes accurately selecting the appropriate investments, creating an apt agenda to replace assets (if required), and diversification of business and income assets based on your residential status.
How to save taxes?
Taxpayers are provided with several options to reduce their tax liabilities. Various sections of the Indian income tax law offer tax deductions and exemptions, of which, Section 80C is the most popular tax-saving avenue. For e.g., Deposits in Public Providednt Fund , Five Year Bank Depoists, National Savings Certificate , Investment in ELSS schemes.
The best and the most optimum way to save taxes is by laying out a financial plan whenever there is a revision in your income and sticking to it. Also, it is a good habit to make tax-saving investments at the beginning of the year rather than making hasty and often incorrect investment decisions at the last moment. To do this, it is crucial to be aware of all the exemptions and deductions available to you.
Tax saving options under Section 80C
Section 80C, one of the most prevalent sections in the Income Tax Act, 1961, provides provisions to save up to Rs46,800 (assuming the highest slab of income tax i.e. @30% plus education cess 4%) on tax liabilities each year. One of the best tax-saving avenues under Section 80C is investing in an equity-linked savings scheme, more commonly known as ELSS. Such tax planning mutual funds offer the dual benefit of potential capital appreciation and tax-saving. Apart from ELSS funds, you can choose to invest in government schemes such as National Savings Certificate (NSC), Public Provident Funds (PPF), tax-saving FDs, etc. Cumulative investments under these securities can offer deductions up to Rs1.5 lakh.
Tax saving options under Section 80D
Under this section, taxpayers are offered deductions on the premium paid towards health insurance policies. Under Section 80D, a taxpayer can claim the following amounts as deductions:
Avail up to Rs25,000 on the premium paid towards health insurance for self, children, or spouse
Avail up to Rs50,000 if your parents are also covered under your health insurance plan
If either of your parents belongs to the senior citizen bracket, then a maximum deduction of Rs75,000 is allowed
Tax saving options under Section 80E
Section 80E offers tax deductions on the interest paid for an education loan. These deductions can be claimed for eight years starting from the date of repayment. There is no upper limit on the deductible amount. This means that an assessee can claim the entire amount paid as interest from the taxable income.
Claiming HRA Exemption
Under HRA, taxpayers can avail exemption on the cost incurred to stay in a rented accommodation. The taxpayer is mandated to furnish the rent receipts provided by the landlord. The deduction available is the least of the following amounts:
Actual HRA received; or
50% of basic salary+DA (dearness allowance) for taxpayers living in metro cities; & 40% of (basic salary + DA) for taxpayers residing in non-metro cities; or
Total rent paid less 10% of basic salary + DA
Other Exemptions and Deductions
Apart from the deductions and the exemptions mentioned above, you can save taxes in several different ways. Donations towards charities and qualified organisations are also eligible for tax exemptions.
Under the new tax regime announced with the Union Budget 2020, individuals can opt to pay taxes at reduced rates and redefined income tax slabs by forgoing the various deductions and exemptions.
Income tax planning, if performed under the framework defined by the respective authorities, is an entirely legal and a smart decision. However, you might land yourself in trouble for adopting shady techniques to save taxes. It is the duty and responsibility of every citizen to carry out prudent tax planning. Based on your tax slab, personal choices, and social liabilities, you can choose from distinct tax saver mutual funds and investment avenues offered to you. Good luck!