Based on the two golden secrets of Tax Planning mentioned hereunder, it is today possible to achieve the goal of maximizing personal income and minimizing personal tax

  • Share your income and lower your Tax Rate.
  • Avail of Incentives and augment your Tax Saving.

Focus on Financial Planning

The thrust and focus of this post in to create greater awareness about financial planning, which encompasses within its fold personal Tax and Financial Planning. Financial Planning has been best defined as,” A strategy to channelize personal saving and investment so as to maximize personal income and wealth and minimize personal taxation.”  

Planning your Taxes is neither Avoidance nor Evasion.. but Prudence

To put in the words of the celebrated legal luminary and former Judge of the Supreme Court, Mr Justice V.R. Krishna Lyer: “ The citizen must pay his taxes but is entitle to plan his affairs to keep as much of his earning as the policy of the law permits. This is neither avoidance nor evasion but prudence.

The Taxpayer, while he must render unto Caesar what is due to him may rightly do justice to himself by planning his programme of allocation, expenditure, investment and exemption in such a manner that he does all that the state, through the law, expects of him and concurrently takes care to do such legitimate exercise in practical tax planning as will keep his liability at the lowest lawfully, not dubiously. Informed intelligence and honest fore- through are virtues of an assessee.”      

India’s Taxing History

The Indian tax payer is indeed fortunate to be in an enviable tax system around the turn of the millennium. It is difficult to believe that some 35 years ago,, he was required to live with system of direct taxes, where the maximum rate of income tax was 97.5%, Wealth Tax 5%, Estate Duty 85%, and Gift tax 75%. That was the time when the eminent Jurist Shri Nani Palkhiwala used to described India as the “Highest taxed nation in the world”

Over the year tax rate has been come down gradually and certain taxes like Estate Duty and Gift Tax were abolished, still many more reform are yet to be taken care of in Indian Tax System.

Tax Planning: The Golden Secrets

I always advised my clients that there are many ways to avoid paying more taxes legally, it’s just you need to keep your mind and ears aware of taxing system. Understanding of how taxing is done is of utmost importance in order to reduce your tax liability.

Here are the two Golden Secrets:

  1. Share your Income and Lower your Tax Rate.
  2. Avail of incentives and augment your Tax Saving.

Let me tell you how this secrets work and how you end up paying very marginal tax amounts. 

If I say, Income Tax of Rs 3, 86,250 on a family Income of Rs 34,50,000/-, Average tax rate of just 11.20%- Myth or reality?? 

If I ask you how much tax will be payable on total family income of Rs 34,50,000/- and I also give you four option 

  1. 3,86.250 
  2. 4,01,700
  3. 5,68,560
  4. 7,83,250

Your tax saving instinct would tempt you to go for the lowest sum of Rs 3,86,250  though you would not be sure how to justify it? Much to your delight, you would be told “Your answer is correct”

I will show you with an illustration, how it is now possible for a family of an individual, his wife and his HUF to earn collectively income of Rs. 34, 50,000 and end up paying income tax of only Rs 3,86,250 at an average rate of just around 11.20%

Illustration: Assume Mr. Patel, Mrs. Patel and HUF of Patel plan to earn taxable income of Rs 11,50,000 in each case, totaling to Rs 34,50,000/- in all. They plan to make saving and allocation of Rs 1.5 Lakh in each case and avail the benefit of deduction u/s 80C. Let’s keep medical insurance and other house property deductions out of the picture for simplicity. Now considering the Tax Rate of FY 2014-15 in mind just refer the following table.

INCOME TAX PAYABLE ON FAMILY INCOME (As per Old Regime)
Particulars Mr. Patel Mrs. Patel HUF of Patel Total Scenario under No sharing of Income
Gross Total Income 11,50,000 11,50,000 11,50,000 34,50,000 34,50,000
Less: Deduction 1,50,000 1,50,000 1,50,000 4,50,000 1,50,000
Taxable Income 10,00,000 10,00,000 10,00,000 30,00,000 33,00,000
Income Tax (Incl 4% cess) 1,17,000 1,17,000 1,17,000 3,51,000 8,34,600
Saving in Tax Liability is Rs 8,34,600- Rs 3,51,000 = Rs 4,83,600!!!!!! 

Rs 4,83,600, Yes this is the amount you save by sharing your income legally. From a liquidity point of view, for saving Rs 4,83,600 you have to invest an additional Rs 3,00,000(1,50,000 *2 ) only and this investment can be in any tax saving instrument which yields approx. 8.5% to 13% return per annum

Remember one thing, there is only one difference between Rich People and Middle Class people, Rich people do not pay higher taxes but middle do.– From The Book Rich Dad Poor Dad.  

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