HOW TO DO TAX PLANNING?

For proper tax planning exercise, it is always recommended that you approach your tax or financial advisor asap and sit with him for the same. Experienced persons who have done this many times would find tax planning easier. Even then, there is no harm in consulting your advisor for the same. For those intending to brush up their knowledge, you can always look out for tax planning related articles and list of avenues to save taxes. The following three step process is generally understood to be a universal tax planning process. Please note that this is a simplistic approach for individual clients which essentially covers the important aspects of tax planning.

1. Calculate Your Taxable Income: The tax is levied on your taxable income, so the first step is to ascertain how much your taxable income will be for the year. There are different heads of income and income in each of it is calculated and treated differently, so it is not going to be very simple. As the first step, you need to sit down and calculate your income from all these heads to arrive at your taxable income. There is no need to arrive at a perfect figure at this moment as this exercise is only to approximately arrive at the taxable income to know the extent of the tax savings you need to do.

2. Calculate spendings & savings eligible for tax breaks: During the year you may have, knowingly or unknowingly, done some expenses and investments which qualify for tax breaks. The most common sections to look for are 80C/80CCC/80CCD (for eligible investments), 80D (medical insurance premium), Section 24 (home loan interest) and 80G (donations). These are just examples and there could be many other sections applicable to you. An important thing to remember is that your spending /savings must have been done by you and the necessary supporting documents or proofs for the same is available with you. The idea here is to calculate the limits provided by IT rules which you have already exhausted under different sections and the balance still available for you to make use of.

3. Planning For Tax Savings: After knowing your taxable income, how much you will need to save and the avenues still available for you to exploit, the final step is to decide what further needs to be done to

save taxes. Frankly, it is your decision and many, at the lower end of tax liabilities, may choose to pay nominal taxes. But if you intend to save as much as you can in taxes, then you will need to plan making further investments. Explore all available avenues and plan your investments as per your preferences.

WHAT NOT TO DO?

In tax planning it is also important to not do few things which will defeat or dilute the whole exercise of tax planning. Any financial decision we make may have huge financial repercussions. Your decisions should be well-thought of, well researched and should be done carefully with patience. Here are few things which you should not be doing...

1. Postpone tax planning decisions further: We have been saving it for long. Tax planning is not a year-end exercise but a year beginning exercise. But if you are late or if you feel there is more scope to save taxes, your available time window is still open, but only for a few weeks. Remember, that tax planning, consultations have to be done now so that you have time to execute your decisions well in advance before 31st March.

2. Focus only on Tax Savings: In India, tax planning in itself is considered as a stand alone financial objective and activity by many. Frankly, nothing can be farther from truth. No investment or expenses should be done purely for the purpose of tax savings. Tax saving can be an additional incentive and objective for another primary objective or need which you should look to fulfill. Think about it, it can be better health protection, social service and so on or simply wealth creation.

3. Buy insurance for tax saving purposes: The idea here is already covered in point above but frankly it needs special mention as most insurance products are sold in these last couple of months purely in the name of tax savings. Please note that insurance is a good avenue and everyone should buy proper insurance policies but they should be driven by your insurance need. If the insurance policy fits the bill for proper insurance coverage which you 'actually need', then only think of buying that policy as you never know when you may need that coverage. Buying insurance, which is like long-term contract with low returns, for tax savings is not a good idea and there are better products for that purpose.

4. Investing more than needed: You can always go overboard after exhausting your limits available for tax planning and there is no downside in doing it. The idea behind this point is that do not make the mistake of a forced financial decision just to save taxes when you don't actually need it. Since the tax saving avenues come with certain restrictions and/or limitations, it is better that we do not go overboard with them. Exceeding your tax saving limits is welcome when those financial decisions are driven by your financial objectives and other needs and not by tax savings.