What is Tax Planning for Employees?
Tax Planning may be described as a legal way of reducing duty liability in a time by investing in different schemes as specified by the income duty Act. It may also include entering or exiting investment schemes so as to save the maximum duty possible within the legal frame. Tax planning for the employees is an important aspect to save money.
Introduction to Tax Planning for Employees
The main goal of every taxpayer is to minimize his Tax Liability. To achieve this objective a taxpayer may resort to the following Three Methods :
o Tax Planning
o Tax Avoidance
o Tax Evasion
It is well said that “Taxpayer is not expected to arrange his affairs in a such manner to pay
maximum tax “ . So, the assessee shall arrange the affairs in a manner to reduce tax. But
the question what method he opts for ? Tax Planning, Tax Avoidance, Tax Evasion !
Let us see its meaning and their difference.
What is the Meaning of Tax Planning for Employees?
Tax Planning involves planning in order to avail all exemptions, deductions and rebates
provided in Act. The Income Tax law itself provides for various methods for Tax Planning,
Generally it is provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates
and relief’s. Some of the provisions are enumerated below :
Investment in securities provided u/s 10(15) . Interest on such securities is fully
exempt from tax.
Exemptions u/s 10A, 10B, and 10BA
Residential Status of the person
Choice of accounting system
Choice of organization.
What is the Objective of Tax Planning for Employees in India?
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 in
channelization of taxable income to different investment avenues thus relieving the
individual of tax liability. The investment amount post lock-in can be utilized for
fulfilling needs and act as the retirement corpus in most cases. All in all, the objective of
tax planning is to reduce tax liability and attain economic stability.
Why does Every Employee Needs Tax Planning?
Tax Planning is resorted to maximize the cash inflow and minimize the cash outflow. Since
Tax is kind of cast, the reduction of cost shall increase the profitability. Every prudence
person, to maximize the Return, shall increase the profits by resorting to a tool known as a
Types of Tax Planning for Employees in India?
Short Term Tax Planning
- Short range Tax Planning means the planning
thought of and executed at the end of the income year to reduce taxable income in a legal
Example : Suppose , at the end of the income year, an assessee finds his taxes have been too
high in comparison with last year and he intends to reduce it. Now, he may do that, to a great
extent by making proper arrangements to get the maximum tax rebate u/s 88. Such plan
does not involve any long term commitment, yet it results in substantial savings in tax.
Long-Term Tax Planning for Employees
Long range tax planning means a plan chaled out at
the beginning or the income year to be followed around the year. This type of planning
does not help immediately as in the case of short range planning but is likely to help in the
long run ;
e.g. If an assessee transferred shares held by him to his minor son or spouse, though the
income from such transferred shares will be clubbed with his income u/s 64, yet is the income
is invested by the son or spouse, then the income from such investment will be treaded as
income of the son or spouse. Moreover, if the company issue any bonus shards for the shares
transferred , that will also be treated as income in the hands of the son or spouse.
Permissive Tax Planning
Permissive Tax Planning means making plans which
are permissible under different provisions of the law, such as planning of earning income
covered by Sec.10, specially by Sec. 10(1) , Planning of taking advantage of different
incentives and deductions, planning for availing different tax concessions etc.
Purposive Tax Planning for Employees
It means making plans with specific purpose to
ensure the availability of maximum benefits to the assessee through correct selection of
investment, making suitable programme for replacement of assets, varying the residential
status and diversifying business activities and income etc.
Fully Taxable Allowance
(1) City compensatory allowance
(2) Dearness Allowance
(3) Deputation Allowance
(4) Entertainment Allowance
(5) Family allowance
(6) High cost of living allowance
(7) Medical Allowance
(8) Non-practicing allowance
(9) Overtime allowance
(10) Project allowance
(11) Rural area allowance
(12) Servant allowance
(13) Tiffin allowance
(14) Warden and proctor
Fully Tax free allowance
1) Conveyance allowance
2) Travelling allowance
3) Tour allowance
4) Helper or assistant
5) Academic and research
6) Uniform allowance
7) Special allowance for
Above allowances will be fully
exempted if :-
(i) Whole amount is spent
(ii) Amount is spent for
office use only
Partly Taxable allowance
1) Education allowance
2) Hostel allowance
3) Tribal area allowance
4) Transport allowance
5) Composite hill
6) Running allowance to
the employees of
7) House rent allowance
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