What is Tax Planning?

Understanding what is tax planning is one of the most important aspect of financial planning. It is a practice where one analyses his financial situation based on tax efficiency point of view so as to invest and utilize the resources optimally. Tax planning means reduction of tax liability by the way of exemptions, deductions and benefits.

Tax planning in India allows a taxpayer to make the best use of the various tax exemptions, deductions and benefits to minimize his tax liability every financial year. As responsible citizens of the country, paying Income Tax on time. Instead of avoiding income tax, one should readily pay tax yet save money by investing in tax saving instruments under different sections of the IT Act.

Objectives of Tax Planning

Tax planning is a pivotal part of financial planning. Through effective tax planning all elements of the financial plan falls in place in the most efficient manner. This results to conduct taxable income to different investment avenues to relieve the individual from tax liability. All in all, the objective of tax planning is to reduce tax liability and attain economic stability.

Best tax saving investments to choose from :

There are various sections in Income Tax Act, 1961, under which an individual tax payer can claim exemption, deductions and benefits. Some of the common ones for tax planning include Sec 80EE for interest on Housing Loan, Sec 80D for premium paid on mediclaim, Sec 80E for interest paid on Education Loan, etc. Amongst these, Sec 80C is the most popular offerings of tax saving investment options.

There are various tax saving options on offer under Sec 80C, Life Insurance premium, PPF, ELSS funds etc. Therefore, ELSS funds take the best part as per financial researchers for two major reasons, (i) its equity based and (ii) it has the shortest lock-in period comparatively. Being market linked, ELSS are high on risk parameter however, they have the potential to offer impressive returns.

Another important parameter in investment option in India is, investments in ELSS can be made in small proportions through SIP instead of paying a heavy sum altogether. Thus an ELSS through SIP route is pragmatic and convenient for an investor who plans to save income tax in India.