Income Tax

Tax Planning and Strategies to Minimize Tax Liability

Tax planning is a continuing effort and a management strategy for ensuring the minimization of the tax liability of an individual. It is essential to thoroughly understand the tax deductions and tax credits. For the purpose of tax planning, the consideration of the taxes paid by the individual/ entity is quite crucial, including the federal and state income tax, use tax, payroll tax, sales and capital gains tax.

Budget 2023 has introduced changes in the new tax regime. As per the new tax regime, there is an absence of any taxes on income up to an amount of Rs.3 lakh. On income up to a limit of  Rs. 7 lakh, there isn’t any tax liability due to the availability of a rebate under section 87A. Salaried assessees can also opt for tax optimization by claiming a standard deduction of up to an amount of  ₹50,000. With a thorough understanding of the tax slabs, maximization of eligible deductions under the new tax regime, restructuring salary, and investment in tax-efficient options, the tax liability of individuals can be optimized.

With effective tax planning, there can be the retention of more of the business’s valuable capital for reinvestment in future business ventures or increasing the take-home pay of business owners and employees. The present article shall discuss Tax Planning and Strategies to Minimize Tax Liability.

Tax Planning Tips to Minimize Tax Liability

Given below are certain tax planning tips which can help to minimize the tax liability of an individual/ entity

• Choosing the Right Business Entity: Making the choice of the right business entity, like a sole proprietorship, LLP, partnership or company, can significantly impact the tax liability of an individual; therefore, the evaluation of the legal, operational, and tax implications of each form of business entity is essential before making a decision.
• Maintenance of Accurate Records: Maintenance of accurate records of all financial transactions, including income, expenses, receipts, and invoices, is crucial for effective tax planning as it can help the individual in the identification of tax-saving opportunities, claiming deductions as well as compliance with the tax laws.
• Opting for Simplified Tax Regimes: The Income Tax Act 1961 (ITA) provides for a simplified tax regime for small businesses in the form of Section 44AD/ 44ADA. Section 44AD/44ADA enables businesses/Professionals the declaration of their income at a prescribed rate of 6%/8%/50% for avoiding the hassle with regards to maintenance of detailed books of accounts.
• Avail the Benefits of Deductions: The Income Tax Act prescribes various deductions under Sections 80C, 80D, 80E, 80G, and others. These deductions can be helpful in the reduction of the taxable income of the assessees, thereby saving their taxes. Some popular deductions include investments in PPF, ELSS, NPS, ULIP, NSC, SCSS, and SSY.
• Invest in Tax-Saving Schemes: Apart from deductions, the ITA 1961 also provides tax-saving schemes like National Pension Scheme (NPS) and Equity-Linked Saving Scheme (ELSS) Public Provident Fund (PPF). These schemes provide tax benefits on the investment amount and the returns.
• Utilization of the Tax Benefits of Depreciation: Depreciation is a tax-deductible expense which enables the reduction of taxable income and tax liability. It is essential to compute the depreciation in the correct manner in order to take advantage of the tax benefits.
• Availing the Input Tax Credit under the Goods and Services Tax (GST) regime: Businesses can claim an input tax credit (ITC) for the payment of taxes on goods and services used for business purposes. The maintenance of the proper records of the input tax payment and utilization of the ITC facility is essential for the minimization of tax liability.
• Planning the Capital Gains: Capital gains tax is applicable to the profits earned from the sale of assets like mutual funds, stocks and property. However, there are certain deductions and exemptions available under the ITA which can help in the reduction of the capital gains tax liability. For instance, an individual can invest capital gains in real estate or tax-saving bonds to claim tax exemptions.
• Seeking Professional Help: Tax planning can be a challenge, especially for small business owners lacking the resources and expertise. Therefore, it is recommended to opt for help from a CA or a tax consultant who can guide the individual regarding the tax laws, provide assistance in the maintenance of records, and help in the optimization of the tax planning strategy.

Options / Strategies to Minimize Tax Liability for FY 23-24

There are certain tax planning options and strategies which can help to minimize tax liability; the same is discussed below-  

1. Buying a home loan for availing the tax Benefits u/s Section 80C: There are various programmes mandated by the Government, such as the PMAY (Pradhan Mantri Awas Yojana) and DDR (Delhi Development Authority) Housing Scheme, aiming for the easy accessibility of houses in India wherein Sections 80C and 24(b) helps in the monetary minimization liability through lowering the tax burdens.
   
   The entire annual income spent on repayment of the principal borrowed amount is eligible for Section 80C deductions of up to 1.5 lacks. Section 24 permits for tax exemption on the interest portion of a house loan up to Rs 2 lakh /year
   
   Furthermore, in the case of the newly purchased property being given on rent by the assessee, the entire interest component is exempt from annual income tax computations.
   
   Persons purchasing a property with the intention of building a home can also benefit from section 24(b), provided the construction process is completed within a period of 5 years.
   
   Section 80EEA allows for the claim of an additional reduction in the annual tax liability of the individual in case him being a first-time homeowner.
   


2. Purchasing a health insurance policy: An individual can claim tax deductions u/s 80D for the portion of their annual taxable income which has been spent on premium payments. Different sums are exempt from such income tax computations depending on the age of the covered.
   


3. Parking the money in government schemes: High returns are offered on total investments, along with tax waivers by numerous government-mandated schemes. Individuals can claim up to an amount of  Rs 1.5 lakh spent on such investments as tax waivers on total annual income u/s 80C of the ITA.
   
   Tax exemptions can be availed by making investments in the  following tools:
   
   1. Senior Citizen Savings Scheme (SCSS)
   2. Sukanya Samriddhi Yojana (SSY)
   3. National Pension Scheme (NPS)
   4. Public Provident Fund (PPF)
   5. National Pension Scheme (NPS)
      


4. Buying life insurance plans: Section 80C of the ITA prescribes premium payments, and Section 10(10D) prescribes the sum promised received at maturity or early death of the insured, whichever happens first.
   
   Yet, if the insurance is bought post 01.04.21, tax benefits of up to the amount of Rs 1.5 lakh paid on annual premiums can be claimed u/s 80C, provided it is less than 10% of the entire assured sum.
   
   If the policy was purchased prior to the said date, claims under Section 80C can be filed, provided the total premium payments aren’t exceeding 20% of the guaranteed sum. 
   
   Acquiring or renewing the life insurance coverage, as well as annuity payments on such plans made through monthly salary, also fall under the eligibility with regards to tax exemptions of up to Rs 1.5 lakh under Section 80CCC.
   
   Only some pension funds u/s 23AAB are eligible for exemptions of up to an amount of Rs 1.5 lakh u/s 80CCD (1).
   


5. Investment options under Section 80C: The most popular tax-saving options available to individuals and HUFs in India which can help in tax planning are provided u/s 80C of the  Income Tax Act ^[1] , ITA 1961 Section 80C includes various investments and expenses which can be claimed as deductions on – up to the limit of Rs. 1.5 lakh in a financial year (FY)

Investment	Returns	Lock-in Period
5-Year Bank Fixed Deposit	6% to 7%	5 years
Public Provident Fund (PPF)	7% to 8%	15 years
National Savings Certificate	7% to 8%	5 years
National Pension System (NPS)	12% to 14%	Till Retirement
ELSS Funds	15% to 18%	3 years
Unit Linked Insurance Plan (ULIP)	Varies with Plan Chosen	5 years
SukanyaSamriddhiYojana (SSY)	7.60%	N/A
Senior Citizen Saving Scheme (SCSS)	7.40%	5 years

Other Tax Saving options beyond Section 80C

Apart from the 80C deductions, there are various deductions available u/s 80C that can help in saving income tax, thereby facilitating efficient tax planning. Tax benefits on home loan interest and health insurance premiums are a few-

• Medical insurance premiums can be claimed at Rs. 50,000. (Rs 25,000 for self-spouse and children and Rs 25,000 for dependent parents below the age of 60 years). Claim medical insurance premium with a maximum payment of up to Rs 1 00,000/ annum if availed for senior citizens. If senior citizens aren’t  covered under any health insurance, then medical expenditure incurred can be claimed u/s 80D up to an amount of  Rs 50,000
• Payment of interest on the home loan can be claimed as a deduction u/s 24 up to Rs 2 lakh. Section 80EE also permits a claim of deduction up to an amount of  Rs 50,000 on home loan interest which is over and above the limit of section 24. Eligibility of additional interest of Rs 1.5 lakh for purchasing a new house  as per  the affordable housing scheme in accordance with section 80EEA is extended till 31st March 2022
• A home loan would also help in the reduction of the taxable income of the individual in the form of the principal portion of the home loan can be claimed u/s  80C up to an amount of  Rs 1.5 lakh, and the interest portion can be claimed in the form of a deduction from income from the house property.
• Any funds or charity to be notified and registered can be claimed by the individual/ entity as a deduction u/s  80G.
• Payment of interest  on  education loans is allowed as a deduction under section 80E

 Conclusion

By the implementation of these tax planning strategies, Indian entrepreneurs can minimize their tax liability, thereby improving their financial position. However, it must be noted that tax planning strategies to minimize tax liability should not be made in isolation and should be integrated with the overall business strategy. It is also important to stay updated with the ever-changing tax laws and regulations and adjust the tax planning strategy accordingly. As a responsible business owner, it is his duty to comply with the tax laws followed by contributing to the economic growth of the country.

Read our Article: A Discourse on Tax Planning Strategies