4 Tips on Perfect Tax Planning for 2021

Given the current situation of the world, the novel coronavirus has already caused a lot of disruption and has put the financial and economic prospects at a standstill. It has had a far-reaching impact on the lives of every person. The governments have taken it upon themselves substantially to cure the world of this virus however, the economic fallout hasn’t gone unnoticed by these officials and they are having difficulty managing this task. As the new year, 2021 is around the corner, it should be in the best interest of everyone, to manage their finances in a more sustained and careful manner, and make the best use of every financial opportunity.

Tax paying is the most tedious toll on the income of any person who falls under the eligibility radius of filing returns. Thus, saving tax can prove to be a lifesaver and improve your hold on investment and savings, and increase liquidity in the market to lead the country out of the economic crisis. Remember, every individual effort counts. Tax planning is the mantra for today and the generations to come. This is the process that involves several steps and technical calculations to decrease one’s tax payment requirement and liabilities. Tax planning now, or ever, will always prove beneficial to any person who follows the cycle diligently. One can also seek assistance from specialists in the field providing CA services for business.

Before divulging the beneficial aspects of tax planning, let us understand why we require this planning. Tax planning is a way to omit the unnecessary tax imposition which needs to be filed in the income tax return. Income Tax Return or ‘ITR’ is a form in which a person is required to file information about his/her income and taxes, which is then submitted to the Income Tax Department of the country. This form is a necessary document that carries information regarding transactions of the given financial year. The Income Tax Act of 1961 and the Income Tax Rule 1962 oblige a person falling under the threshold of compulsory filing, to submit ITR to the Income Tax Department at the end of every financial year. This means if a person files his return for the year 2020, the information contained in the form shall be from April 1st to March 31st of the given financial year. Proper documents must be attached to the return in order for it to be considered valid in the eyes of the Income Tax Department. 

This brings us back to the reason why tax planning is important to avoid the hassle that filing these returns can cause. Some of the benefits include –

• Increasing productivity: This means that a person can convert taxable funds into income-generating sources. These sources usually refer to investing in projects and shares. By generating such sources, we cannot omit the filing of returns, but it will help utilizing resources which were taxable but did not generate any income.
• Decreasing litigation: Litigation refers to the process of decreasing tax payments through legal procedures. This implies that both the taxpayer and tax collectors are to be involved in the matters of the court.
• Attaining stability economically: One can stimulate the economy organically and directly with proper tax management. It can be done to ensure that the revenue source of government is being treasured with honesty.
• Downsizing liabilities: One can invest in different types of funds to decrease the liabilities that come with earning. The most common funds that people invest in are Long Term Equity funds and mutual funds.

PLANNING TAXES EFFICIENTLY

The steps that are required to be undertaken for tax planning are simple and the purpose remains the same throughout. 

1. The first step in the process is to take your total income into account. The first basic process requires accuracy as the next steps will build upon. Therefore, it is important to ensure that one is assessing the monthly and annual income correctly. You can also hire CA services for tax to do the needful.
2. The next step is to evaluate which incomes are taxable. The rent allowance and house benefits which are included on tope of the base pay are not taxable. However, the profits made from investment are taxable. A person, investing in the name of his wife to avoid taxes will not get the chances to do so as even housewives will be required to file returns. 
3. Deductions should be used in order to ascertain the total taxable income. This can be done by structuring and proper planning. 
4. Invest in tax-saving instruments. Section 80 provides a wide range of deductions available to tax payers. Other options are listed in the Income Tax Act of 1961. Investments in PPF or Provident Public Fund, National Saving certificates or even 5-year bank deposits are good investment options. 

After understanding how to plan the taxes, let us understand the different ways by which this can be done efficiently to save taxes and increase savings. 

1. Availing the benefits of Section 80

This is the most common clause that people use to receive tax deductions. According to this section, an individual is eligible for tax deductions if the annual salary they receive is under 1,50,000 per year. However, a person can also claim a higher tax deduction if they invest in a National Pension Scheme account. The National Pension Scheme, also known as NPS, is a pension scheme that encourages the working sector to create a pension upon retirement. According to this, one receives a considerable return on their investment as the return rate is around 12%. Section 80 comes with a number of subsections that one can utilize to make the most of exemptions and deductibles. The schemes under this section function as tax-saving instruments.

• Section 80D – This is applicable to the individuals who create medical insurance. In addition to insuring themselves, one can also add loved ones. Under Section 80D, an individual can obtain a deduction worth Rs 25,000 on the insurance. It also offers coverage to the person that has parents who are younger than 60 years. This additional deduction involves another Rs.25,000. However, this does not include medical bills.
• Section 80CCC – This section involves deductions on funds that go up to 1.5 lakhs per year. In a nutshell, one can expect a deduction for the payment of any amount towards the annuity of an insurer. The plan must go towards creating a pension for the future. The amount is taxable only when one surrenders the annuity. The interest and bonuses that one receives on this annuity are also taxable.
• Section 80 CCD – This section involves the pension fund as well. A person can claim this deductible if they deposit an amount into their pension fund. An individual can attain a maximum deduction if the amount is Rs. 1.5 lakhs or 20% of the GTI of a person if they are self-employed. For individuals who are employees themselves will receive a tax deduction worth 10% of their salaries.

1. Investing in ULIPs

Unit Link Insurance Plans (ULIPs) are special insurance plans which also act as a tax-saving instrument. These plans are a hybrid of life insurance and investment. When one hand over money to go into a ULIPs, a significant portion goes towards a life insurance plan, and the rest becomes a part of an equity-based fund. Therefore, an individual can get the best of both worlds as well as enjoy tax exemptions and returns, making it one of the best tax-saving tips. At Canara HSBC Oriental Bank of Commerce Life Insurance, one can receive a number of ULIPs which contain a variety of benefits. The plans differ for an individual and a group. A few includes:

• Future Smart Plan

• This ULIP is eligible for individuals. The plan involves creating a fund for one’s future offspring. A child of an insured will receive a sum of money after the death of the individual as well as premium funding in case of a disability.

• Term Edge Plan

This plan involves ensuring the employees of a company are against certain risks. This plan offers frequent periods to pay the premium as well as receive rebates.

• Canara HSBC Oriental Bank of Commerce Life Insurance also offers the Jeevan Nivesh Plan. This is a traditional insurance plan. This plan offers benefits like settlement options, which involves the ability to convert the guaranteed sum that is assured on maturity into annual pay-out. In addition to this, one receives higher rebates for a higher premium.

2. Investing in mutual funds

Investing in mutual funds is probably one of the more generic ways for reducing one’s taxable income. This is especially true when one invests in Equity Linked Savings Scheme (ELSS). This scheme receives tax deductions on the basis of Section 80C.

It has a lock-in period of only three years, which is lower in comparison to other tax saving options like Private Provident Funds and Bank Fixed deposits. These options usually require a lock-in period of eight years.

In addition to this, there is no imposition of tax on these funds. Research has shown that one can save up to Rs 46,000 by participating in this scheme. It also has the potential to provide the highest returns in comparison to other funds.

3. Attaining tax deductions on salaries

This tax deduction mostly applies to assets that are not permanent. For example, a house on rent. If a person is paying rent for the house they live in at the moment; then they can file for tax deductions under Section 10(13A). This states that an individual can file for tax deductions if they are required to pay for the rent in the house that they reside in but have to show receipts for the same.

HRA is a tax-saving scheme that usually comes from one’s employer. It is calculated by the actual rent that one pays minus 10% of the salary that one receives. In case an individual lives in a metro city, then 50% of their salary is eligible for tax deductions. 40% of the salary is eligible for individuals living in other cities.

4. Save taxes through philanthropic activities

Donating to charity also comes with its fair share of tax deductions. This aspect of tax-saving aims to encourage donations to charities and other philanthropic activities. This tax deduction also includes the donations that one might make to the National Relief Funds.

The information regarding this is present in Section 80G. The deductions can be minor to almost 100%. However, it does depend on various factors like charity or other financial conditions.

CONCLUSION

Using the following methods, one can ensure that they structure their investments and flow of money properly to secure their assets and minimize their liabilities. Taxes in India are a major source of revenue for the government, however, in the last financial year, the government suffered greatly along with the people in coping with grace financial distress. Tax planning tips in 2021 will help you evade an unnecessary tax burden and rejuvenate the growth of the market. It is recommended to get awareness from the Tips to save money on personal IT returns to make your financial status more convenient and stressless in the future.