Financial Literacy – Tax Planning

Financial literacy helps in tax planning. A financially literate person is expected to understand complexities of tax planning. Tax planning therefore becomes easy for knowledgeable person. With financial knowledge one understands, how one can take advantage of various permissible exemptions like rebates, exclusions etc. so that tax liability becomes minimal. In tax planning, one is supposed to analyse his individual financial situation from tax perspective and plan in a way so that the tax implications is lowest. Tax planning is therefore necessary to efficiently plan the finances with the objective of tax reduction. Tax planning must be done without indulging into any kind of tax evasion activity or getting into anything illegal. Efficient tax planning is also known as smart planning.

Objectives of tax planning:

· Minimizing Tax Liability: Maximum saving within the permissible limit must be done. This helps in two ways; on one hand one can save which will definitely help in future and secondly it helps in tax saving also.

· Litigation is avoidable: Correct & Fair calculation of tax will always be safe and no possibility of any litigation

· Plan for good Investment: Money saved by way of smart tax planning can be wisely invested to fetch better returns

· Helps in Economic growth: Tax paid by the individuals used in nation building, so it is an indirect way of helping the economic growth of the country 

Tax planning is required to be done according to one’s occupation and income. Everybody, irrespective of his business, has to plan his taxes as he comes under one of the following categories:

Salaried class

Self-employed class

Farmer/Agriculture class

Retired class

Salaried Class:

This category of people are always concerned about the income tax as such they timely plan their taxes. They try to find/calculate the tax implications with the help of their organisation’s accounts departments. It is important for the individual to understand both the earnings and deductions part separately. Some of the organisations pay through different allowances or so to say indirectly to save tax, similarly tax benefits or tax exemptions need also to be understood by the individual. Knowledge of both the heads are important so that any mistake committed by the computation clerk may be corrected, but, that is possible when the individual understands the intricacies. This category of people cannot hide any income.

Self-employed class:

This category of people generally have good knowledge of everything including the taxation. They know how, where and how much should be saved or invested, so the tax implications become minimal. People in this category are fully responsible of their tax liability. Some of the points they must keep in mind are:

·        All work/business related expenses can be claimed as business expenses.

·        Proper books of account are supposed to be maintained

Farmer/Agriculture class:

IIn India, agricultural income is tax free. Agricultural income means income generated from the land where farming is supposed to be carried out. It may also be given for rent but the purpose should only be agriculture. Some salient points are:

·        Existence, usage and cultivation of land is must, to get the tax benefit

·        Agricultural income though tax exempted yet needs to be calculated with other income

·        Proper accounting is supposed to be done to claim the benefit

·        In case of loss from the farming business, the same may be carried forward.

·        Income attributable to agricultural income under section 2(1A) is subject to the satisfaction of stipulated conditions. 

Retired class:

Retired people from government, public or private sector need also to calculate and file their return if they have taxable income. Tax planning, therefore is necessary for them also. If they have the knowledge they can compute and file the return on their own else they can take the help of a professional. Following documents must be taken into account for tax calculation:

·        Pension Income (if any)

·        In case of re-employment(after retirement) income from salary

·        Saving bank statements (All banks)

·        Public Provident Fund Deposit (if any)

·        Interest of Fixed Deposits

·        Rental income(if any)

·        Insurances – Life, Medical, Home, Vehicle etc.

·        Home Loan (if any)

·        National Pension Scheme(if any)

·        National Savings Certificates(if any)

·        Etc.

Therefore Financial Literacy is necessary for tax planning, which is every year’s activity. Lack of knowledge may force the individual to be totally dependent on somebody else which always has its own limitations.