Define What is Tax Planning?
Every person pays taxes to Government either directly or indirectly which is used for running the government machinery and welfare of the nation. Taxes form an important part of the every person trying to make a living in this world.
Taxes are levied by the government on the earning of the person may it be individual or companies. Taxes are deducted generally upfront (called Tax deduction at source) and the rates of deductions are almost 1/3rd of the income. In view of this high rates of taxation, Tax planning becomes very important.
Tax planning is an approach where the person getting the income plans the investments and expenses in such a way that he is able to claim all legally allowable deductions under various heads of the tax laws thereby reducing the taxable income to the extent possible. Only the balance income becomes liable to tax.
Is it Legitimate ?
This results in reduction of the tax and also the creation of maximum possible income within the permissible options available. Tax planning is treated as a legitimate option and it involves the proper arrangement of the income in such a manner that the tax liability is reduced to a great extent thereby allowing the person to create some wealth through investments.
How to Plan?
There are many instruments which can be used for the Tax planning such as investments in Bonds, Insurance policy, Taking of Housing Loans etc. All these options allow you to invest the earned income into assets or buying other financial instruments which are permitted under the Income Tax laws.
Tax Planning requires the person to analyze his future need, income expected and the understanding of the possible avenues which are permitted under the laws. It is different from Tax avoidance where the person opts for the illegal means to avoid the tax liability.
Tax planning is like getting smart in approach towards utilizing the available avenues to use the hard earned money towards reducing the tax liability. It calls for arranging the financial affairs in a manner that it does not attract much take and the balance taxable income is reduced to the extent possible. There are some Tax credits available and some deductions for the expenses such as School Fee for children, deductions on account of medical expenses, permissible donations etc. which can be utilized to reduce the tax burden. In case the person is not well verse with the tax knowledge it is advisable to consult some expert on Tax advisory services – Loans Near Me