Tax Planning

What is Tax Planning?

The Indian government provides deductions for some expenses or investments for social benefits. Some of the expenses where deductions are allowed are interest on education loans & home loans, investments in pension schemes, ULIPs, some debt products, etc. These deductions reduce taxable income, thus lowering the tax liabilities. Also investment in some products provide financial growth.

Tax Planning is structuring of various expenses and investments in a tax efficient manner so as to reduce overall tax liability

Why do I need it?

There is an old saying, 'Penny saved is penny gained'. The right type of tax planning not only helps one save on taxes but also helps one to invest in right kind of assets which lead to financial growth. This helps in overall financial gain for the individual.

But many a times, investments done to reduce the overall tax liability may not be financially beneficial to an individual. For example, investment in FD for more than 5 years is exempt under section 80D. But this investment to save tax may in the end be disadvantageous to the investor. The same amount if invested in other products like ULIPs or Equity linked savings scheme which are also deductible will be of far more value to an aggressive investor. Similarly one might buy extra insurance just to save tax but he might already be overinsured and hence it leads to further wastage.

Thus it is necessary to do one's tax planning in such a way that it not only leads to highest savings in taxes but also leads to financial growth in line with investors expectations.