Tax planning helps in creating wealth

There are multiple options available for investment ranging from ELSS, PPF to insurance policies to save tax on a monthly basis

Every year, people buy tax saving plans to lower their tax burden. There are several plans/products that are approved by the government, which help us save taxes under various parameters.

The problem is buying these plans erratically without understanding them properly. All these result in owning unsuitable products which give very low returns that can’t even beat inflation. But, have we ever wondered that tax planning if done effectively can generate real long- term wealth for our future? As per Investopedia, “Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency, with the elements of the financial plan working together in the most tax-efficient manner possible.”

There is a provision for certain deductions under the Income Tax Act, which can help the taxpayers save tax at time of filing returns. And this is possible only through efficient tax planning. Some of the ways through which one can save tax are explained below:

Under Section 80 C, Section 80 CCC, Section 80 CCD
To promote the very idea of savings and to inculcate this habit in the citizens of our country, the government allows certain deductions if the amount is saved in the instruments specified in Section 80 C. The maximum deduction allowed under these Sections clubbed together is Rs 1.5 lakh only. There is an additional deduction of Rs 50,000 under Section 80 CCD for investment in National Pension Scheme. There are multiple options available for investment under these sections ranging from ELSS, PPF to Insurance Policies. One should be really careful for their choice of product depending on their long-term goals and the expected returns.

Under Section 80 D, Section 80 DD, Section 80 DDB
Government of India allows for deductions if the taxpayer has done some expenditure for insuring his health as well as the health of his family. For Section 80D, the limit is Rs 25,000, and for senior citizens, it is Rs 30,000. Similarly, there are different limits for medical expenditure done on self or relatives under Section 80 DD and Section 80 DDB.

Tax saving through home loans
If you have taken a home loan, then you can save taxes through below mentioned ways:
Home Loan Principal repayment amount comes under Section 80 C and is part of the deduction up to Rs 1.5 lakh. The interest portion of home loan offers a separate deduction up to Rs 2 lakh under Section 24. If you are a first-time home owner and the value of the property purchased is less than Rs 50 lakh and the loan taken is less than Rs 35 lakh, then you can claim an additional deduction of Rs 50,000 on interest over and above the deduction allowed under Section 24. This deduction comes under Section 80 EE. 

There is another provision by the government of India under which if you have taken a loan on your second house as well, there is no limit on income tax deduction on the interest payment of second home loan. As per the Union Budget 2017-18, the government has now proposed to cap such amount to maximum of Rs 2 lakh.

Tax saving through education loan
There is a provision for deduction under Section 80 E for interest on education loan. This loan may be taken for self, spouse, or children or for the student for whom taxpayer is a legal guardian. There is no limit on amount that can be claimed and this deduction is available for maximum of eight years or till the interest is paid, whichever is earlier. 

Tax planning underlong-term capital gains
Capital gains is the profit one realises when he/she sells the capital asset (land, building, house property, etc.) for a price higher than purchase price. If there is any long-term capital gain, taxpayer can claim exemption by investing the amount of gain from the sale in the specified instruments. These are few of the many ways for efficient tax planning which can help in generating long-term wealth. The objective of tax planning should be to save money and invest in the instruments which earn higher inflation- adjusted returns keeping in mind investors’ comfort with the risk, tenure, and liquidity of the instrument chosen.
This way our long-term life goals can easily be taken care through tax planning by choosing  tax efficient products.

(The writer is Managing Director at Sinhasi Consultants)