Tax Planning in India – Plan Taxes for Salaried Person, Self-employed & Corporates

In this article, we have come up with everything about Tax Planning in India. You will learn about how Tax Planning can be done for Salaried Individual, Self-Employed & Corporates too.

When it comes to paying taxes, we all hesitate and try to find ways to get away with it. However, just with a little tax planning, we can save taxes and also not fall for any legal problems.

Tax planning is a necessary thing to reduce the tax burden which is not properly implicated by people in this country. We all try to run away from paying taxes rather than planning it thoroughly.

Thus, this article is going to help you all out there who are looking for saving taxes and also to keep up with the legalities.

About Tax Planning

Tax Planning is a part of financial planning that deals with the analysis of the financial position of a person as per tax-efficiency.

This simply means that how efficiently you plan your taxes to save your annual income and boost your finances.

There is an abundance of tax exemptions, deductions, and other tax-benefits available in the Income Tax Act, and these are penned by the Tax authorities. You can put all these into use and save your money.

Tax planning is used for reducing the tax burden but there are other objectives of it as well which are discussed in the later section of the article.

Now, since we know a bit about tax planning, now we will know in detail about how a salaried individual, self-employed or corporates can plan their taxes.

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Tax Planning for Salaried Person

Salaried people have a fixed amount to be credited in their bank accounts every month. They have to make their living out of the same which includes everything from daily needs to investments.

While tax planning is important for everyone, it is most important for the salaried people because of their given expenses within that fixed income.

However, there are various provisions for them as well to reduce their tax burden. The different provisions that a salaried person can use to plan his or her taxes are as follows –

Standard Deduction

This is only for the salaried people and now you know the importance of tax planning for an abundance of provisions for them in the IT Act.

So, being a salaried person, you can claim a standard deduction of Rs.40000 in a year from your total income.

Earlier there was an exemption for medical reimbursement and transport allowance worth Rs.15000 and Rs.19200. Now it is a total amount of Rs.40000 that you can claim as a deduction.

House Rent Allowance

Most of the salaried people living in rented accommodation for work gets House Rent Allowance from their employer. This is exempted from tax given certain criteria.

The least of these three below-mentioned amounts can be exempted as HRA –

• Full HRA received
• Rent paid minus 10% of the salary
• 50% of the basic salary for metro cities and 40% for the non-metro cities.

If the HRA is less than Rs.3000, then the employee does not need to submit any rent receipt for claiming the HRA else they have to.

Leave Travel Allowance

Many employers provide allowance to their employees for their vacation. However, the allowance covers the basic airfare or the rail ticket prices for domestic travel with family.

Here family means spouse, children, and parents. So, if you have got some leave travel allowance this year, make sure to deduct the same from the total income in the ITR (as per the rules).

Meal Coupons

Many employers provide meal coupons to the employees. You can use these coupons to claim tax benefits up to Rs.2600 per month.

Deductions as per section 80 C to 80 CCD

You can claim deductions if you have invested in tax-saving schemes like ELSS, Life insurance, EPF, mutual funds, National Savings Certificates, and others.

As you know multiple investment schemes are exempted from tax. So, make sure to invest in such schemes to channelize your funds in the right way along with reducing the tax liability.

Interest on Home Loan

If you are repaying your home loan, the interesting part can be deducted from your total income. Yes, you can deduct up to Rs.2 lakhs from your total income against the home loan interest you pay.

Section 80D

You can claim a deduction for your medical expenses as well and Mediclaim premiums that you pay. You can claim up to Rs.50000 of the deduction for premiums you pay for Mediclaim for your family.

Section 80E

In case you have taken a loan for your education or your child/spouse, then you can get an exemption for the repayment of the loan amount with seven years from the disbursement of the loan.

Section 80U

If an employee is 40% disable (physical disability) then he is allowed to claim a deduction of Rs.75000 per year.

If the disability is more than equal to 80%, then the deduction allowed is Rs.1.25 lakhs as per the current tax regime.

Section TTA

You can also claim deductions on the income earned from interest on bank savings and fixed deposits. The allowable deduction is Rs.10000 in a year.

Section 80G

You can reduce your tax burden by sharing a part of your income with a charitable house. It is deductible under section 80G of the IT Act.

However, whether 50% of the amount will get deducted or the full is dependent on the type of charitable trust.

So, there is an abundance of provisions for salaried people in the Income Tax Act of India, 1961 to reduce the tax burden.

There are deductions, exemptions, allowances, perks, and other such benefits. This is availed in the right way, then you can reduce your tax burden to a great extent.

On the other hand, you can invest in great schemes and accumulate wealth.

More information related to GST and Tax Planning

Tax Planning For Self-Employed

Here is a detailed understanding of How Tax Planning should be done for a Salaried Individual.

Who is a Self-Employed Taxpayer/Assessee?

A self-employed taxpayer is not working or drawing a fixed salary from any organization.

They are working for themselves taking short or long-term contracts from different clients and earning from the same by providing services or goods.

The doctors, CAs, architects who have their chambers and work for themselves can be considered to be self-employed as well.

The income of the self-employed assessee comes under the ‘income from business and profession’ source of income head.

Tax filing for Self-Employed

The income of the self-employed assessee can be calculated by –

• Presumptive taxation
• Real profit-based taxation

Presumptive Taxation

Presumptive taxation is applicable for the self-employed assessee as per IT Act, 1961. Under this process of taxation, the important things to keep in mind are –

• If the annual turnover is less than equal to Rs.50 lakhs, then presumptive taxation as per section 44 DA of the IT Act will be applicable. Otherwise, if the income (turnover) is between 50 lakhs to Rs.2 crores then, as per section 44AD, the process will be applicable.
• In the case of business income – 8% of the gross receipts are deemed to be minimum income. While for the profession, the minimum income is deemed to be 50% of the gross receipts.
• In the case of digital receipts, the minimum income would be 6% (deemed).

The assessee can opt for the presumptive taxation if he or she wants. If not then his or her decision would be valid for the next five assessment years. They cannot change that for those five years.

After that they can shift, however, whether they opt for it or not, the decision once taken would continue for the next five years.

If you are opting for presumptive taxation, then you have to file your return before 31^st July of the assessment year. There is a penalty of Rs.10000 if you do not file ITR within this date.

Real Profit-based Taxation

Supposedly, if the assessee doesn’t opt for the presumptive taxation, then his or her income would be audited by a certified Chartered Accountant.

Then the taxable income and tax liability would be calculated based on the real income and expenditures.

In the case of income above Rs.2 crores, taxable income calculated needs to be done following the special format of the IT department.

The CA must follow the same format so that the tax officer can easily calculate the income.

Advance Taxation

In case, the income of the self-employed assessee is over Rs.10000 in a financial year, then they need to pay advance tax. The rates and the dates are given below –

• You need to pay 15% of the estimated tax by 15 June
• 45% by 15^th September
• Next is 75% of the estimated tax by 15^th December and
• Finally 100% by 15 March of the financial year.

However, if the assessee has opted for presumptive taxation, then there is no need to make any tax payments on an installment basis.

All you need to do is to pay on the 15^th of March, 100% of the estimated tax.

If there is any difference between an actual tax and estimated tax paid, it can be refunded.

Applicable Income Tax for Self-Employed

The income tax slabs is the same for the self-employed assessee. There is no change in that. You have to pay income tax only if your income crosses Rs.2.5 lakh limit.

How a Self-Employed can reduce the Tax Burden?

All the deductions under section 80 can be used by the self-employed assessee. You can make use of the 80C, 80 CCC, 80 CCD, and all the other sections.

You are eligible for all the exemptions just like a salaried individual and this will help you reduce your tax burden.

Surcharge for Self-Employed

As the income of the self-employed falls under the ‘income from business and profession’ head, there is a surcharge which you need to pay. Applicable surcharge rates are given below –

• If you earn more than Rs.50 lakhs, then you have to pay a surcharge at the rate of 10% of the tax liability. For instance, if the tax liability is Rs.20000, then the surcharge would be Rs.2000. Total tax payable would be Rs.22000.
• Similarly, if the income is over 1 crore, the rate also goes up to 15%. Taking inputs from the above example, now the surcharge would be Rs.3000 and the total tax payable would be Rs.23000.

So, the tax planning of the self-employed assessee is a little different from the salaried because of the presumptive taxation and advance tax payable, and the surcharge.

However, the ways to reduce tax liability remains the same.

Tax Planning for Corporates

Here you will find all details of any Corporate should plan their Taxes –

What do you mean by Corporate Tax Planning?

Corporate Tax planning means making room for reducing the tax burden for the corporates. Corporates are the independent legal entities that are built for carrying on a business.

There are foreign and domestic corporates in India. Both are liable to pay taxes as per the Income Tax Act of India, 1961.

The domestic companies are registered in India and also the companies which have their control and management in India (wholly) but registered in foreign countries.

The foreign companies are companies registered outside India and also having their control and management outside of India.

Income Sources of Corporates

• Income from the business (business profits)
• Capital gains from selling shareholdings/ assets
• Rental income from properties
• Dividend income or income from interest

For the domestic companies, the tax rates applicable for the 2020-21 assessment year are as follows –

• As per section 115BA – companies whose turnover is limited up to Rs 400 crores in the financial year 2017-18 are 25% and the surcharge is 7% (up to Rs. 10 crore of income), 12% (for turnover above 10 crores).
• As per section 115BAA, the tax rate is 22% and the surcharge is 10%
• For Section 115BAB the tax rate is 15% and the surcharge is 10%
• For any other case, the tax rate is 30% and the surcharge is again either 7% or 12% as per the turnover is less than Rs.10 crores or above respectively.

If the corporate earns income from royalty or fees for providing technical services to the government, and any organization in the country as per the agreement made before 1^st April 1976, which is approved by the central government, then the corporate needs to pay 50% of the same as tax.

Similarly, for any other income (from other sources) the corporate has to pay 40%.

How Corporates can Save Taxes? – Tax Planning for Corporates

There are multiple tax rebates that corporates can avail of and plan their taxes accordingly. Let us take a look into the rebates available for the companies in India –

• Dividend received from other companies can be claimed as a deduction in a few cases.
• Venture capital firms have special provisions under the Tax laws.
• If the corporate deals in export and undertakes new ventures, they can avail of special deductions
• Setting up of new power sources and infrastructure can let you avail of certain deductions
• You can carry forward the losses of the corporate for the next eight years. This can reduce the tax burden of the upcoming years.
• In certain cases, capital gains, interest incomes, dividends can be exempted from tax.
• You can also show a breakup of the profit amongst the director to reduce the tax liability. For example, the corporate firm earns an income of Rs.1000000 a year. However, if you divide this into 4 directors of the firm, then individual they are earning Rs.2.5 lakhs which is exempted from tax.

Tax Planning for Corporates Continues

• Expenses incurred for the incorporation of the firm is exempted from tax. Start-up firms can easily avail of this benefit.
• You can show salary expenses which you pay to your family members. This will get deducted and reduce your total income of the firm.
• You can also have a sitting director and his fees are available for deduction from the profit of the company.
• Capitalization of the assets can help you reduce your tax burden. For instance, the furniture you buy for your office, laptops, etc. which have a shelf life of more than 1 year can be capitalized. This will help you reduce your income in the form of depreciation and other expenses.
• Rental expenses can also be used for reducing the total taxable income of the firm. For example, you are paying rent for the factory or the showroom, then you can deduct the same from the taxable income.

So, there is multiple provision for the corporates as well to reduce the income tax they need to pay.

Types of Tax Planning

Now as you know what tax planning is, let us see the different types of tax planning that exist in the Indian Tax system –

Short-range Tax Planning

When you plan your taxes just before the due date, it is known as short-range tax planning.

Though a substantial amount of taxes can be saved by this type of planning, it doesn’t help in the long-term. It helps you to reduce your tax liability to a nominal extent.

Long-range Tax Planning

If you are planning your taxes throughout the year, which leads to efficient tax saving can be termed as long-range tax planning.

At the beginning of the financial year, the plan is chalked out and then the assessee follows it to reduce his or her tax burden to a great extent.

Purposive Tax Planning

There are deductions and exemptions in the IT Act for reducing your tax burden.

When you use these provisions with the purpose of not only saving taxes but also for proper investment and saving taxes, it can be termed as purposive tax planning.

Here the investments you make are apt according to your risk-return profile and not just because you want to save taxes.

Accumulation of wealth and saving taxes go hand in hand under this tax planning.

Permissive Tax Planning

This tax planning also involves using the deduction and other benefits to reduce taxes.

However, here the main motive is to reduce the tax liability and not investment or rather investment is the secondary thing here.

Objectives of Tax Planning

While we all know the fundamental objective of tax planning is to reduce the tax burden, there are certain other objectives as well which are –

Reduce Conflict of Interest

To reduce the conflict of interest between the taxpayer and the tax collector. Both have different interests and thus there is friction there.

So, minimizing that friction is necessary for a proper tax system.

Investment Purposes

Though we think that reducing tax liability is the main motto of tax planning, channelizing the fund into proper and fruitful investment is more important.

So, here comes the productivity factor where making your investment count is the primary lookout of tax planning.

Investment is an important aspect of Tax Planning an it is done by Salaried Employees, Self-Employed & even Corporates in order to make use of Extra Funds.

Economic Growth

The growth of the economy is another major purpose of tax planning. The tax you pay goes to the government for different projects which it does for the citizen of the country.

The tax collected is the revenue of the government and thus it helps in boosting the economy. It also provides stability to the economy and the government.

Reducing Tax Liability

Finally, for the taxpayers, the main purpose will be reducing tax liability. So, yes if you do your tax planning right, you can reduce a lot of tax burden.

Advantages of proper Tax Planning

Tax Planning is equally helpful for all types of tax payers be it a Salaried-Person, Self-Employed & Corporates.

If you are wondering why you need to go through the tax planning process, then here are some of the benefits of tax planning for you –

Helps in Tax Saving Investments

Firstly, it will help you channelize your funds into proper tax-saving investment instruments. This will in turn help you generate wealth and save taxes simultaneously.

Reduces your Tax Liability

Secondly, you do not fall for any dispute with the tax authorities. Tax planning helps you to reduce your tax burden.

This reduced tax liability is affordable for most people. So, once you pay the taxes to the IT Department, there is no chance of getting into any trouble for the same.

Benefits Economy

Then comes the benefit to the economy. Yes, you are a part of this economy, and you must help it grow. Your tax goes into the revenue of the government with which it undertakes various projects.

Increase Profit Margin of Business

Finally, by reducing your tax liability through effective tax planning, you can increase your profit margin of the business or annual income as well.

Drawbacks of not Planning your Taxes

Tax Planning is very important for everyone be it Salaried-Employee, Self-Employed or Corporates.

Often it has been seen, that there are certain mistakes people make when it comes to tax planning. You need to avoid these mistakes for effective tax planning.

However, to avoid the mistakes you need to know them well –

Delay or postponing tax planning

One of the biggest mistakes most of us do is postponing the planning of taxes. While it is done from the starting of the financial year, we mostly do it when the due date approaches.

This leads to ineffective planning and in turn, you cannot optimize the plans.

Power of compounding

In investment, compounding plays a huge role. Thus, the earlier you invest, the more your fund will get compounded.

So, it is important to consider the compounding factor of your investment as well.

Insurance products for tax-saving investment

Obviously, there is a great provision for those who are purchasing insurance for tax-saving u/s 80C however, it needs to be done earlier and not before paying the taxes.

Improper utilization of deductions and exemptions

Often, we couldn’t make proper utilization of the exemptions and deductions allowed in the IT Act.

Supposedly, without knowing the fact that the maximum allowable deduction under section 80C (including all the sub-section) is Rs.150000, we invest more in the instruments mentioned under these sections.

This leads to investment without any tax savings. We need to know each of the provisions well in advance and plan accordingly.

Conclusion – Tax Planning

In conclusion, we can say that in a salaried-person or self-employed or the corporate, tax planning is important for each of them.

There are multiple means of reducing the tax burden in the Income Tax Act of the country.

You just need to plan the taxes from the initial days of the financial year so that you can optimize the provisions laid down in the tax laws.

Tax Planning FAQs

Ques – I live in my own house, can I claim deduction on HRA?

Answer – No, you cannot claim a deduction on the House rent allowance if you live in your own house. HRA deduction can be claimed only if the person is living in a rented house for his or her job.

Ques – I donated a certain amount to a political party. Can I claim deduction under section 80GG?

Answer – Yes, under section 80GG you can claim deduction providing the criteria mentioned in this section.

Ques – Can I get a tax exemption on my gratuity income?

Answer – Yes, you can claim a deduction for the gratuity you earned for retirement, incapacitation or termination, or being the widow of the deceased person. The claim can be up to an amount of Rs.10 lakhs.

Ques – Do small businesses need to pay corporate taxes?

Answer – The corporate taxes are applicable only for the corporate organization registered under Income Companies Act. No small businesses need to pay any corporate taxes. Their income is taxable under the head ‘income from business and profession’ only.

Ques – Which ITR does Self-employed need to file?

Answer –Self-employed need to file ITR 3 in case they do not opt for presumptive taxation.

Ques – Is TDS deduction from the income of the professionals?

Answer – Yes, TDS deduction from the income of the professionals at a rate of 10% of the gross receipt.

Ques – Do self-employed taxpayers pay more taxes than salaried people?

Answer – In certain cases, yes. It is because of the fact that the salaried people have more provision for reducing their taxes using the available deductions and other exemptions which are not available to the self-employed people.

Ques – What is the tax planning?

Answer – Tax planning collectively talks in relation to that aspect of one’s economic planning where they construct or examine their financial position as per the tax-efficiency.

Ques – Why do we need tax planning?

Answer – When we talk about our economy it majorly consists of salaried personals that have a fixed amount that is to be credited in account every month. Thus, when it comes to situating their needs in the right place with their income, a level of planning needs to be done.  Therefore ranging from house rent allowance to other expenses, tax planning is a very important segment of one’s finances.

Ques – Shall we plan taxes after investing?

Answer – It’s highly advised to calculate one’s taxes before investing, as it then gives the individual a broader spectrum about which investment carries the lowest tax rate that suits with their expectation and personal financial budget. Therefore, it’s always best to plan the taxes before investing into something.

Ques – Should I do the tax planning myself or get expert advice?

Answer – Financial advisers have indeed been great assets in the economy to help one plan their taxes and lead fruitful returns on investment (if made any). However, it is a complete personal choice, individuals with background knowledge and thorough research can very much do their own tax planning.

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

Answer – Yes, one’s tax plan determines their expenses and financial gains or charges to a great level. However, if tax planning can be done rightly any individual can help themselves get rewarding deduction and also enjoy greater investment opportunities and have returns with low tax value. Thus, your tax planning very much sync with your financial plan.

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

Answer – Government has given multiple means of reducing the tax burden in the income tax act of the country. In order to properly utilise that, tax planning is very necessary. However, choosing to blindly pay taxes can rob an individual to take benefit from various deduction and investment opportunities.

Ques – How am I going to productively use the tax saved?

Answer – One can use their saved taxes in various investment opportunities that are given by the government.  There are many investment instruments that carry a low risk on investment and give higher returns.

Ques – Are you planning your taxes creatively?

Answer – Creative tax planning refers to not just getting major deduction or exemption in the taxes but on getting lucrative benefit out of it.  The creative tax planning singlehandedly save one from the burden of taxpaying and as well provide higher investment returns with low rate of tax on the returns.

Ques – What are the types of Tax Planning?

Answer – The Indian tax system comprise of various tax planning which ranges from short-range tax planning , long rand tax planning , purposive tax planning and ends at permissive tax planning.

Ques – How to plan tax through HUF?

Answer – The HUF can give an individual an extra hand when it comes to planning taxes.  The Hindu Undivided Family is highly beneficial for families that compromises of joint incomes , which leads to a joint pan card allotment to the entire family leading them to enjoy new Income Tax Slabs, making the income tax free to a specified limit.

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