The term Tax Planning refers to the use of the saving instruments (deductions & exemptions)

given by the government so as to decrease the tax liability, but sometimes the word tax
planning is misunderstood and the people choose the ways of tax evasion and tax avoidance.
The tax planning is completely legal and is done keeping in mind all the rules and regulations.

For example; If Mr. A as an individual has an income of 5, 50,000 for the assessment year
then the tax that he needs to pay is 70,000. Solution: according to the tax rates of assessment
year 2009-2010 the calculation is as follows;

=50,000 x 30% = 15000 (Above 500000 30% Tax)

=200000 x 20% = 40000 (Between 300000-500000 20% Tax)
=140000 x 10% = 14000 (Between 1, 60,000 – 300000 10 %)
=3% education Cess on 69,000 (15000+40000+14000) = Rs 2070

Tax Payable = 15000 + 40000 + 14000 + 2070 = 71,070

If Mr. A decides to deposit Rs 70,000 to the Public Provident fund then the tax liability will
change because his taxable income comes down to 4,80,000 and his tax liability will come
down to 51, 500 this is called the Tax planning.

Tax avoidance is within the legal constrains and is done using the loopholes of the system.
For example a company is thinking of starting a manufacturing unit and it has lot of land in
the present city where its head office is located but it sets up the manufacturing unit in some
of the northern states or backward states as there is 100% deduction.

Tax evasion is completely illegal. Here the person tries to show false figures or cook up the
books so as to completely reduce the tax liability. For example the person may have
purchased a car for personal use and while giving the details he puts it as used for renting and
when he does it the depreciation amount that he will get increases and hence the total
income decreases or in another case a company may just set up a dummy manufacturing unit
in a backward state and prepare those parts in some of its own manufacturing units. The
company gets tax deduction but it is illegal and if found guilty then it may be punished.

Tax planning Vs Tax Management

There is always some confusion created by these words and most often the person who is
doing a tax planning thinks that he is managing the tax and vice versa in some cases. We will
have a look at some of the points which clearly indicate that these are two different words all
together.

The tax planning is a wide term and the tax management comes under it. Tax planning is
done in order to reduce the tax liability whereas the tax management is paying the taxes in
compliance with the set rules. The tax planning is done for the future whereas the tax
management relates to the past, present and future.
Tax planning is not at all a complex process provided the assessee knows the tax code. The
complete knowledge is not necessary all he needs to know is the correct tax slabs and the
various deductions allowed. Today as we are living in a very busy world we tend to overlook
at the tax planning and hurry things when the due date is fast approaching where as if there
is a proper tax plan then we will be reducing the tax liability. Having said this now let us have
a look at some of the deductions.
(Note: we will be mainly focusing on the deductions that are allowed for the individuals)

Deductions Under Income tax

Below given are the major deductions available under the income tax act.

Section 80C
It gives deduction upto Rs 1, 00,000 for the investment done by an assessee in Public
Provident Fund, National Saving Certificate, Accrued interest on National Saving Certificate,
Life Insurance Premium, Equity Linked Savings Schemes (ELSS), 5-Year fixed deposits with
banks and Post Office etc.

Section 80D
Section 80D gives the assessee 100% tax deduction for the medical insurance premium paid
by him for his or spouse’s or the children’s medical insurance. An additional tax deduction of
15000 is given if he has paid the medical insurance of his parents and it will be increased to
20,000 if they are senior citizens. Point to be noted here is that the payment should be made
by any means except by cash.

80GGA
If the payment is made to the scientific research association or to a university or to a college
for scientific research or for the statistical research then under the section 80GGA then 100%
of the amount is taken as deduction.

80G
The donations given to some of the approved funds or institutions are given an exemption of
50% and 100% in certain cases under 80G.

80E
Under the section 80E the interest on the loan that is taken for the higher education is eligible
for deduction.

80GG
Under the section 80GG the house rent in excess of 10% of taxable income, paid by a salaried
or self employed person who is not getting the HRA( House Rent Allowance) then 25% of the
total income or Rs 2,000 per month (whichever is less) is given as deduction.
Everyone has a fair knowledge about the insurance policies available, medical insurances,
post office savings account, house rent allowance, donations for research so we will discuss
about some of the deductions in the 80C.

Provident Fund
The provident fund is defined as a retirement benefit in which the employee and employer
both part with certain amount of salary which is invested with the provident fund authorities
or in the self maintained provident fund. The interest earned is credited to the provident
account of the employee on a regular basis. There are four types of provident funds

• Statutory Provident Fund

• Recognized Provident Fund
• Un-Recognized Provident Fund
• Public Provident Fund
Of the above the in first three types both the employer and employee needs to pay part of
their salary whereas in the fourth one only employee pays and maintains the provident fund
and this one is completely exempted. The maximum amount a person can deposit annually in
the Public Provident Fund is 70,000 and the whole amount is taken as exemption. The rate of
interest is 8% and is not liable for any tax. The important point to be noted here is that the
provident fund is a long term investment i.e for 15 years. The PPF account can be opened by a
salaried person in state bank of India or other associated banks such as state bank of mysore,
state bank of rajasthan etc. The minimum amount that one needs to deposit to his PPF
account is 500 and maximum limit is 70,000. The advantages of PPF may be that it is
completely tax exempted, one of the safest investment, the investment can be taken as an
exemption etc. the dis-advantages may be like the capital is held for a long time, the interest
rates are lower compared to the FD rates etc.

Equity Linked Saving Scheme (ELSS)

ELSS is one of the investment options. The maximum amount that is exempted is 1, 00,000.
The difference between ELSS, National Saving Certificate (NSC) & PPF is that the lock in
periods is 3, 6 & 15 years respectively. The best way to invest in the ELSS is by Systematic
Investment Plan (SIP). According to SIP every month the investor invests a fixed amount of
money in the market. It is done to take advantage of the market fluctuations for example in
one month if the rate of a unit is 40 rupees and the investor is investing 2000 rupees then in
that particular month he will be buying 50 units and in the next month if the unit price is 20
rupees then he will end up by buying 100 units. The advantages of ELSS are that the money is
locked in for short period of time; the dividend can opt for payment etc. The dis-advantage is
that returns are directly depending on the variations of the markets.

Tuition fees
The tuition fees are rising and reaching the sky every year thus there is a deduction of 1,
00,000 in under section 80C upto two children. If both the parents are working then only one
of them can claim the deduction. This deduction is applicable for recognized educational
institutions and only the tuition fee is exempted. Transportation fees, admission fees do not
come under this.

Note
The deductions for insurance, PPF, tuition fees, ELSS is given totally as 1,00,000

The assessee must know utilize the deductions so as to reduce the tax liability but must take
care that he doesn’t invest his money in only one avenue. The safest would be to invest in
many avenues taking into account constant returns, safety and tax exemption.

Let us have a look at an example under 80C

PPF/ ELSS ELSS=20,000 ELSS=40,000 ELSS=50,000
PPF=20,000 40,000 60,000 70,000
PPF=40,000 60,000 80,000 90,000
PPF=50,000 70,000 90,000 1,00,000
PPF=70,000 90,000 1,00,000 1,00,000
PPF=90,000 90,000 1,00,000 1,00,000
PPF=1,10,000 90,000 1,00,000 1,00,000
In the above example a person has invested in PPF and ELSS and different combinations are
given. The maximum limit for PPF exemption is 70,000 that’s why even though the PPF has
risen to 90,000 and 1, 10,000 and ELSS=20,000 (in both cases) the total amount exempted is
90,000. It is the same in case of total exemption for example PPF=70,000 & ELSS=40,000 the
total would be 1,10,000 but the exemption given will be 1,00,000 because that’s the
maximum limit.

Importance of tax planning is

Mr. A is earning 4,00,000 per annum he has not done any investment and his children tuition
fees is 50,000 but they are learning in unrecognized education institutions so it is not
exempted. Mr. B earns the same amount per annum and out of his earnings he has
deposited 10000 to his PPF account, paid insurance premium of 4000, ELSS=15000, and paid
children tuition fees which amounts to 50,000. Mr. C is also earning 4,00,000 and out of that
he has deposited 20,000 in his PPF account, paid insurance premium of 10000, ELSS=50,000
Mr. A Mr. B Mr. C
Total income 4,00,000 4,00,000 4,00,000
(-) Deductions
PPF Nil 10,000 20,000
Insurance Nil 4,000 10,000
ELSS Nil 15,000 20,000
Children tuition fees Nil 50,000 50,000
Total deduction Nil 79,000 1,00,000
Taxable income 4,00,000 3,21,000 3,00,000
Tax 34,000 18,200 14,000
3% education Cess 1020 546 420
Total Tax liability 35,020 18,746 14,420
Hence in the above example it is seen that the person who has done a tax planning can
reduce his tax liability.

Tax Planning is a legal tool to avoid the tax. If you have a fair idea about tax bracket and
deductions you can save a great portion of your income by avoiding tax. We believe that the
information provided in this article had helped you to create fair idea about tax planning. For
any queries on the topic kindly get back to us.
T

Before buying or renew any Insurance or Investment Plan like

Term,chidren,future, pension,Health,Fixed Deposits etc… call once for
comparison of all product and save money and get a higher benefit.

For Further Details kindly Contact :

Thanks and Regards,

Kirang Gandhi
Corporate Financial Planner
www.kgandhi.anindia.com
m-9271267305
ax Planning is a legal tool to avoid the tax. If you have a fair idea about tax bracket and
deductions you can save a great portion of your income by avoiding tax. We believe that the
information provided in this article had helped you to create fair idea about tax planning. For
any queries on the topic kindly get back to us.