Tax planning is a vital part of the financial roadmap of an earning individual. A well-thought-out tax plan ensures savings on taxes while simultaneously conforming to the legal obligations and requirements under the I-T laws. The primary objective of tax planning is to save money and mitigate one’s tax liability.
If tax planning is done in a prudent manner, one can make the best use of the various tax exemptions, deductions, and benefits to minimize tax liability in a financial year. Tax planning is a legitimate way of lowering one’s income tax liabilities, however, caution must be maintained to ensure that the taxpayer isn’t indulging in tax evasion.
Here are the five simple yet effective golden rules of tax planning:
Easy, simple, and hassle-free should be the objectives of your tax planning approach. The most important thing you should keep in mind is that tax planning must serve your twin purposes i.e. investment and tax savings.
Saving tax legally is a reality but only for those who plan their taxes based on such principles. This would also result in avoiding all the worries and tensions as all their incomes, assets, and investments are duly accounted for from the point of view of taxation.
Take full advantage of tax deductions:
Various tax deductions are available under the Income Tax Act. One should try to avail the benefit of these deductions for each and every member of the family. The various investment options that offer tax rebates should be reviewed keeping in mind various aspects like the age factor, etc. A checklist should be prepared of the various deductions permissible under the I-T law.
Use tax exemptions:
The next step of tax planning lies in knowing and claiming exemptions permissible under the tax laws. If you and your family members are not claiming the optimum benefit of exemptions and deductions, then it is time to focus on investment planning in the group so that every family member gets the full benefit of tax exemptions and deductions.
Make sure income is spread among family members
The very first thing that helps in tax savings is adopting the concept of divide and rule. The simple rule is that each family member must have his or her independent source of income so as to legally become an independent taxpayer under the income tax provisions. In case the entire income of a family belongs to just one member, the tax liability is much higher than when the same income is spread among different members of the family.
Avoid last-minute tax planning
Experts are of the view that last-minute tax planning does more harm than good, so it is advisable that one should do such planning in advance. Advance planning gives a taxpayer enough time to study and compare various investment plans with tax-saving options.