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Importance And Benefits Of Tax Planning

Q: How tax planning is different from evasion and avoidance?

Tax planning can be defined as an arrangement of one’s financial and economic affairs by taking complete legitimate benefit of all deductions, exemptions, allowances and rebates so that tax liability reduces to minimum.The line of demarcation between tax planning and tax avoidance is very thin and blurred. Tax avoidance is reducing or negating tax liability in legally permissible ways and has legal sanction like Legitimate arrangement of affairs to minimize tax, Tax evasion may involve stating an untrue statement knowingly, submitting misleading documents, suppression of facts, not maintaining proper accounts of income earned etc., All methods by which tax liability is illegally avoided are termed as tax evasion. An assessee guilty of tax evasion may be punished under the relevant laws.

Updated on: Apr 21st, 2025

7 min read

Tax planning should be an integral part of your finances. It’s your loss if you don’t make use of the available deductions and exemptions to save on taxes. Paying taxes is a way of contributing to the nation’s development, but when the government is providing you with options to save taxes, it is only wise to do so.

Importance Of Saving Taxes

Let’s understand tax planning and its benefits with the help of an example. Consider Akash, an IT professional living in a metro city with annual compensation of Rs 16 lakh. He is currently repaying an education loan of Rs 22 lakh which he had availed to fund his higher education. His monthly salary is Rs 1,33,334.

The break-up of his salary is as follows:

Basic salary: Rs 50,000
House rent allowance: Rs 25,000
Special allowances: Rs 58,334

As per the information above, Akash is falling under the 30% income tax bracket, the highest of the current income tax slabs. If Akash doesn’t have a proper tax-planning in place, then he will end up paying a substantial amount as taxes every year.

The tax payable by individuals earning over Rs 10 lakh a year is a whopping Rs 1,12,500 plus 30% of the income over Rs 10 lakh. Akash did not make any other investments apart from the compulsory EPF contribution of Rs 21,600 last year. As a result, he could save only Rs 6,740 in taxes last year.

Benefits Of Tax Planning

Minimise Tax Liabilities and Maximise Savings

As the definition clearly states, the main vector of tax planning is a legal reduction in tax assessments. Thanks to numerous deductions, exemptions, and credits, people and enterprises can save quite a lot of money yearly, and those who adhere to accurate tax planning can contribute their resources and savings to their well-being instead of the state.

Optimise Investments and Financial Decisions

Tax planning is an essential part of an individual’s or business’s enabling investment decisions. Planning for taxes allows all parties to examine their investments and transactions’ tax implications. As a result, tax-efficient investment strategies may be implemented to help taxpayers reach their financial goals and see a higher return on investment.

Tax Incentives and Deductions While Complying With Law

The Indian government offers numerous tax incentives and deductions to inspire precise activities and investments. By accomplishing tax planning, people and businesses can discover and gain from those incentives and deductions. This includes deductions for costs including domestic loans, clinical fees, education charges, charitable contributions, and greater. India has a complex tax system with diverse tax laws and policies. It may be tough for people and companies to navigate through the difficult tax panorama with out right making plans. By undertaking tax making plans, taxpayers can ensure compliance with tax legal guidelines, keep away from consequences or legal issues, and keep a very good standing with the tax government.

Manage Cash Flow Effectively

Tax planning lets individuals and businesses to manipulate their cash flow correctly. By aligning profits and expenses, taxpayers can ensure a clean float of budget throughout the year. This enables in averting cash drift crunches and ensures monetary stability.

Achieve Long-Term Financial Goals

Tax saving plans are a fundamental part of Long-term financial planning. By thinking about the tax implications of diverse monetary selections, individuals and groups can align their techniques with their long-term goals. This consists of retirement plans, estate making plans, succession planning, and other aspects of monetary management.

How To Save Taxes?

The Income-tax Act 1961 provides taxpayers with several options to reduce their tax payable. Various sections offer tax deductions, out of which Section 80C is the most popular. Amongst exemptions, claiming house rent allowance (HRA) is the widely used exemption. The best way to save taxes is to lay out a financial plan as and when there is a revision in your salary and to stick to it. Also, it is essential that you make tax-saving investments in the first half of the financial year so that you don’t make hasty investment decisions at the end of the year. Furthermore, it would help if you claimed all the exemptions and deductions you are eligible for. To do this, you should know and understand the various exemptions and deductions available.

Note: It is to be noted that if you opt for the new tax regime, limited deductions and exemptions are allowed.

Section 80C

Section 80C is the most popular section in the Income Tax Act, 1961. It provides provisions for taxpayers to save up to Rs 46,800 a year in taxes. Section 80C covers several tax-saving investment options, and investors can choose to invest in any of the options to avail of the deduction of up to Rs 46,800 a year. The best tax-saving option under Section 80C is the equity-linked savings scheme (ELSS). It is an equity-oriented mutual fund scheme, offering the dual benefit of tax-saving and wealth growth.

Apart from ELSS, you can invest in government savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC), tax-saving FDs, and so on. Cumulative investments in these options will provide deductions of up to Rs 1.5 lakh. You can also claim deductions towards your payments made towards children’s school tuition fee and home loan principal repayment under Section 80C.

Now, let’s see how Akash can save more tax under Section 80C. Akash is already making a compulsory EPF contribution of Rs 21,600. That means, he still has a provision to claim a deduction of Rs 1,28,400 by making investments under options covered under Section 80C. Considering that he fully utilises the Section 80C limit, his tax savings for the year would be:

Particulars	Income tax is saved when the 80C limit is not fully utilised	When the 80C limit is fully utilised
Total deduction under Section 80C	Rs 1,50,000	Rs 1,50,000
Compulsory EPF contribution	Rs 21,600	Rs 21,600
Investments in Other Section 80C Options (ELSS, PPF, LIC Policies, and so on)	Nil	Rs 1,28,400
Income tax saved	Rs 6,740	Rs 46,800
Additional taxes saved after fully utilising Section 80C limit	Rs 40,060

Claiming HRA Exemption

Taxpayers staying in rented accommodation can avail exemption on the rent paid by them under HRA exemption. For this, they need to furnish the rent receipts issued by their landlord. The amount of exemption will be the least of the following: i) Total HRA received. ii) Total rent paid reduced by 10% of their basic salary. iii) 40% of the basic salary for taxpayers residing in non-metro cities and 50% of the basic salary for taxpayers living in metro cities.

Now, let’s see how Akash can avail HRA exemption. If he is paying a monthly rent of Rs 25,000, then his HRA exemption calculation is as follow:

Particulars	Amount
Total HRA received (Rs 25,000 x 12)	Rs 3,00,000
Total rent paid reduced by 10% of basic salary	Rs 2,40,000
50% of basic salary (he is living in a metro city)	Rs 3,00,000
HRA exemption	Rs 2,40,000
Tax benefit	Rs 74,880

Section 80D

Section 80D provides taxpayers with tax deductions on the premium paid towards health insurance policies for self, parents, spouse, and children. The taxpayers are can claim the following amounts as deductions under Section 80D: i) Up to Rs 25,000 on the premium for health insurance availed for self, spouse, and children. ii) If your parents are covered under the insurance policy, then a maximum deduction of Rs 50,000 is allowed. iii) If either of your parents is a senior citizen, then the maximum deduction allowed is Rs 75,000.

Now, let’s see how Akash can utilise the provisions of Section 80D to save taxes. He buys a health policy for himself by paying a premium of Rs 20,000. He later decides to cover his parents as well under the policy. He spends an additional Rs 53,000 to do so. Akash’s father is aged 61 years. Hence, he can avail an additional deduction of up to Rs 50,000 towards the premium paid to cover his father. Thus, Akash can claim Rs 70,000 paid by him (Rs 20,000 for covering self and Rs 50,000 for covering parents, one of whom is a senior citizen) under Section 80D this year. He saves Rs 21,840 in taxes under this Section.

Section 80E

Those taxpayers having availed education loans can make use of the provisions of Section 80E to save on taxes. Taxpayers can claim deductions of the interest paid towards education for eight years, starting from the date of repayment. The loan should have been availed from a recognised bank or non-banking financial institution. There is no capping on the deductible amount. The entire amount paid as interest can be deducted from the taxable income.

As Akash has availed an education loan, he is eligible to deduct the interest paid on the same. He has paid Rs 2,50,000 this year as interest towards his education loan. The Section 80E provisions allow him to deduct the entire Rs 2,50,000 from his taxable income. He saves Rs 78,000 in taxes.

Section 80CCD(1B)

Section 80CCD(1B) provides an additional deduction of up to Rs 50,000 for contributions made to NPS. The additional deduction of Rs. 50,000/- under Section 80CCD(1B) is available over and above the benefit of Rs 1.50 lakh deduction under Section 80CCD(1).

Section 80EEB

Section 80EEB of the Income Tax Act allows you to claim tax savings of up to Rs 1.5 lakh on interest paid on a loan made specifically to purchase an electric vehicle.

Interest On Housing Loan

While obtaining a housing loan can be costly, it is also possible to benefit from several tax deductions that can save money each year. It is important to understand how to maximise these benefits.

Tax benefits of house loan summary

Deductions	Section	Maximum Deduction (INR)	Conditions
Principal	80C	1.5 Lakh	House property should not be sold within 5 years of possession.
Interest	24b	2 Lakh	The loan must be taken for the purchase/construction of a house, and the construction must be completed within 5 years from the end of the financial year in which the loan was taken.
Interest	80EE	Rs.50,000	The amount of loan taken should be Rs 35 lakh or less, and the property’s value does not exceed Rs 50 lakh. The home loan should be taken between 1st April 2016 to 31st March 2017.
Stamp Duty	80C	1.5 Lakh	It can be claimed only in the year these expenses are incurred.
Interest	80EEA	1.5 Lakh	The stamp value of the property should be Rs.45 lakh or less. The taxpayer is not eligible to claim a deduction under Section 80EE. The home loan should be taken between 1 April 2019 to 31 March 2022.

Other Exemptions And Deductions

Apart from the deductions mentioned above and exemptions, there are several other ways to save on taxes. Donations made towards qualified organizations and charities are eligible for tax exemptions in the range of 50% to 100%. Donations made towards those charities covered under Section 80G are eligible for 100% deduction. The Prime Minister’s National Relief Fund, National Foundation for Communal Harmony, and National Defence Fund are some of the funds that allow 100% deduction.

Tax planning is not as hard as it seems. Every taxpayer should look to optimise their tax outgo. Tax-saving investments should be considered as they not only save taxes but also help in accumulating a corpus which can be used to cover various life events.

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Frequently Asked Questions

What is income tax planning?

Income tax planning is an adoption of appropriate tax avoidance strategies. It is vital for both individuals and businesses to regulate tax and plan their tax affairs. It is a systematic arrangement of their financial affairs to save tax expenses that is essential for protection against arbitrary and excessive taxation. Income tax planning is reducing the tax liability without breaking up.

Is Tax planning a legal process?

Tax planning is legal and does not include any unlawful measures to avoid tax. It simply guides you to benefit from the provisions under the Income Tax Act, 1961 to save tax.

How tax planning is different from evasion and avoidance?

Tax planning can be defined as an arrangement of one’s financial and economic affairs by taking complete legitimate benefit of all deductions, exemptions, allowances and rebates so that tax liability reduces to minimum.

The line of demarcation between tax planning and tax avoidance is very thin and blurred. Tax avoidance is reducing or negating tax liability in legally permissible ways and has legal sanction like Legitimate arrangement of affairs to minimize tax,

Tax evasion may involve stating an untrue statement knowingly, submitting misleading documents, suppression of facts, not maintaining proper accounts of income earned etc., All methods by which tax liability is illegally avoided are termed as tax evasion. An assessee guilty of tax evasion may be punished under the relevant laws.