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Seven questions you need to ask yourself before tax planning

07 Jul 2023

With a new financial year just commencing in India, most professionals, executives and businessmen start planning for their annual taxes. The key is to manage taxes in such a way that you can minimize your tax outflow. The question, therefore, is how to reduce income tax and how to do tax planning? Your returns on salary, interest and capital gains are always judged in post-tax terms and hence your taxes must be planned in such a way that your tax liability can be minimized to the extent possible. Here are 7 questions you need to ask yourself about tax planning when you start the activity this year. Over to some tax planning questions and answers..


Should I do the tax planning myself or get expert advice

While filing of tax returns is quite simple with the advent of digital e-filing, you still need expert advice on how to handle the laws and bye-laws of the Income Tax Act. A professionally tax advisor will be in a better position to help you manage your taxes in the best possible way and also reduce your tax liability. Normally, your financial advisor can double up as your tax advisor (we will see this point in detail later). But in case you feel that you need a more granular focus on tax rules, then you can always consult a tax expert.


Is my tax plan in sync with my overall financial plan?

This is perhaps the most important aspect you need to factor in while planning your taxes. Remember, to plan your taxes you need to invest and these investments must be in sync with your overall financial plan. If your financial plan allows you to allocate up to 60% in equities, you can just keep buying ELSS funds for tax saving outside the ambit of your overall financial plan. When you make the tax plan a sub-set of your overall financial plan then you will ensure that your asset allocations are in sync.


What is my trade-off in paying tax versus planning tax?

When you plan taxes there is always a trade-off. If you do not play then you will have to pay the full tax. That brings us to the next question. When you invest to save tax then is the investment really worth it. It will depend on how you select your tax saving investments. For example, if you are planning to save tax under Section 80C, then your lock-in is 5 years in case of Bank FD but just 3 years in case of ELSS. Also, ELSS is more tax efficient and helps you to create wealth in the long run, which the bank FD cannot. These are factors you need to consider when you consider the tax payment versus tax planning trade-off. At times, it may make more sense for you to just pay the tax than plan for it!


Am I adopting a tax planning approach in sync with income flows?

Don’t put yourself in a situation wherein you have to run around to arrange funds in the last quarter to make your tax-saving investments. That is what a lot of people do. A better way is to adopt a SIP approach to tax saving. Instead of buying ELSS funds in bulk at the end of the year, you can get the same tax benefits by doing SIP on ELSS funds. It not only gives you the benefit of rupee cost averaging (RCA) but also ensures that your SIP outflows are in sync with your income flows. This makes your cash flow matching much easier.


How am I going to productively use the tax saved?

Tax planning is not just about saving taxes but also about you use the money so saved. You need to achieve two purposes with tax planning. Apart from reducing your taxes also need to plan how you will productively utilize the money so saved. For example, if you are going to save Rs.12,000 per year by taking Health Insurance, then what are you going to do with the Rs.12,000 saved. That is like an income and needs to be accounted for. Here is how:


ParticularsJust spend the moneyPut in Bank FDCreate Monthly SIPAllocating Rs.12,000 saving per annumNothing investedRs.12,000/year at 7% FD rate and 30% taxRs.1,000 per month at 15% annual CAGRAfter 20 yearsNothing createdRs.363,480 (post tax)Rs.78.54 lakhs


As can be seen from the above table, a more productive approach to your taxes saved, by itself can make a huge difference to your wealth creation.


Have you remedied pending tax cases?

Before you start tax planning ensure that any previous queries raised by the IT department pertaining to old returns or any notice sent to you are responded to. If previous queries or cases are not cleared, then the IT department will withhold your refund till the time your earlier cases are cleared. Quite often, these notices are just routine notices but if you do not respond to them then it will show as “Pending” against your name. You can check these out by logging in to your secured PAN area on the Income Tax website.


Are you planning your taxes creatively?
Let us clarify at the outset that this has nothing to do with creative accounting. What we mean here is that there are a variety of legitimate options provided by the IT department to use methods like the HUF or trusts or gifts to reduce your tax liability. You may not be able to do this on your own and hence it is best that you consult a tax advisor for professional advice. Tax planning is perfectly legitimate as long as it is within the realm of the rule book. In fact, it is your right to save taxes!

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