The Top Reasons You Should Prioritize Tax Planning
Mr. Sharma and Mr. Chauhan are partners in a business. In addition to their business earning, both are very good at generating income from other sources like equity investment, buying or selling properties after a certain period of holding, life insurances, etc. Also, both of them pay all taxes to play on a safe side. In spite of similar income sources, Mr. Chauhan is richer than Mr. Sharma.
Importance of Tax Planning
Because Mr. Sharma pays more tax as compared to Mr. Chauhan which automatically deducts more money from Mr. Sharma’s income sources. Higher tax payments are decreasing the wealth creation abilities of Mr. Sharma.
Now, what Mr. Chauhan is doing differently when it comes to pay taxes?
A two word answer is: “Tax Planning”.
What is Tax Planning?
Simply, tax planning is a legal way of taking measures to decrease your tax payments and increase your income from the money saved.
Apart from saving money, you have more reasons to implement Tax Planning. Let’s discuss each of them briefly.
- Increase Your Wealth with Legal Tricks
As you know that all your income sources like salaries, house property selling, capital gains, etc are taxable. Tax is much higher when a single person is responsible for the income of whole family. Authorizing each adult of your family, for being the independent source of income, will decrease your tax charges up to a great extent. One can implement this strategy by receiving or offering income in the form of gifts, to its own family members, like insurance gift to a child. Gifts make your income non-taxable.
“Tax Reduction Equals to Wealth Expansion”
This is just one trick to lower the amount of taxable income. There are many. With proper tax planning, you can take more legal steps to save your money and grow your wealth.
- To Minimize Tax on Your Investment Profits
Your investments are the combination of your money .as well as your time. You wait long enough to generate profit from them. It might be 2-3 years of investment on real estate or 5 years of equity investment. And when the time comes to enjoy the long-awaited profits, all you worry about is how much tax you are going to pay.
There is one provision exist that can save you from such worries.
According to this provision, if you invest your real estate gains on a manufacturing startup, all your tax on long-term capital gains will be wiped off.
Tax planning keeps you aware of all such tax rules & regulations and how to use them for your benefits.
- To avail Tax Advantage on Your Losses
Everybody knows that you have to pay tax on your profits, but do you know that you can save tax from your losses?
Let’s say you have earned a 2 lakh profit from one of your long term equity investment and suffered a loss of 1 lakh from another long-term holding. Without tax planning, you will pay Rs. 20,000/- (10% of 2 Lakh) as your tax + loss of 1 Lakh. In total, you earned only Rs.80,000/- from your investments.
If you follow your tax planning rules, your total income will be counted as 1 lakh ( 2 lakh profit – 1 Lakh loss). This result into 0 tax charges as you haven’t exceed the limit of earning more than 1 lakh as per LTCG (Long term capital gain) rules.
- To Avoid Over Payment or Underpayment
That sounds rare but it does occur, so often, without the knowledge of payee. There are many causes of overpayment or underpayment.
4 Most-Common Causes of Over payment or Underpayment are:
- Incorrect Amount Entered in Tax Files
- Changes in Paychecks after Tax Payment
- Incorrect Consideration of Historical Tax Payments
- Tax payer forgot to claim the credit
Paying taxes are kind of relief from financial worries for people. That’s why no one cares to re-check all files of tax payments. One of the key roles of tax planning is to verify all payments even after completion of whole process. If any error found, you can take necessary steps before it’s too late.
- To Avoid Penalties
Being an entrepreneur or a responsible salaried person, you must be keeping track of when to pay tax to avoid late payment charges. But this is not the only penalty charge that exists. You may face penalty if you forget to file any form related to your employees or anything related to your foreign holdings.
You won’t do it on purpose. Mistakes can take place because you can’t keep track of filling each form for all your details. With the help of a well-prepared tax planning, you can make sure that all your tax-relevant data reached to department to avoid unnecessary penalties.
- To Avoid Unknown Law Violation
What if you enter incorrect information? What if you forget to file a form? What if you underpay by mistake? Icing on the cake would be, one day, you receive a notice dictating your violation of tax laws with a punishment and you don’t have a slightest idea of what’s going on. It will take days to understand your mistake and another couple of days to settle the same with tax department. Tax planning acts as your home to keep you safe from storm of unknown law violation.
Also Read: How to use Zerodha Brokerage Calculator?
Do you want to stuck or save?
All in all, tax planning gives you full control over payments. It helps in reducing your taxes, increases your wealth and lets you enjoy maximum profit from your investments. Additionally, it prevents you from making mistakes which leads to avoidance of unnecessary law violation, unknown extra payments and punishments. Now it’sup to you, whether you want to relish benefits of tax planning or want to stuck in-between tax hassles.
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