Income tax planning is an essential aspect of financial management. It is important to have a solid understanding of the various tax laws and regulations that impact you and businesses alike. Effective income tax planning can help minimise your tax liability and provide opportunities for future growth and investment.
Whether you are a small business owner, a salaried employee, or a high-net-worth individual, income tax planning can play a critical role in achieving your financial goals. This article will delve into the necessary tax planning terms that you need to be aware of for better finance management.
Income Tax Planning Terms You Need to Understand
If you are just a beginner at the entire tax paying scene, chances are that you are unaware or have limited knowledge of the tax planning terms in India. And if that’s the case, below are some of the basic tax-related terminologies you need to understand for better income tax planning:
1. Basic Exemption Limit
As a responsible citizen of India, you are required to pay taxes. But that’s not obligatory as soon as you start working. To pay income tax, you need to fall into a certain tax slab for your income to become taxable. And how do you know you are eligible to pay taxes? Through the basic exemption limit.
In income tax planning, the term basic exemption limit refers to the minimum income limit. If your income exceeds this minimum income limit, it becomes taxable. In simpler terms, you don’t need to pay any taxes if your income is less than the decided minimum income limit for the financial year.
2. Previous Year
The financial year in India is different from the calendar year. It begins on the 1st of April and ends on the 31st of March. So, no matter what month you start working, if you fall in the payable tax slab, you need to start your income tax planning for the financial year that begins on the 1st of April and ends on the 31st of March.
Tax deduction is another most-used term in income tax planning. But what is it? Tax deductions are benefits you get to decrease the amount of your taxable income. These deductions are an expense you incur or a deduction from an income, like income tax on FD. It’s subtracted from your gross income for calculating your total taxable income and helps in income tax planning.
Several investment schemes allow deductions on your taxable income. Investing in these schemes can relieve you of some deductions on your total income that are otherwise taxable.
4. Income Tax Slabs
The total tax rate subtracted from your income differs for everyone, depending on your income. Tax planning in India has divided taxpayers into different groups, which determines how much tax will be subtracted from the total income. These sets of groups are called tax slabs.
A decrease or increase in your income affects the tax slab you’re calculated in. Depending on the regime you select, old or new, different tax slabs have different tax rates on income. So, check what tax slab you fall in to start your income tax planning.
5. Gross and Taxable Income
The gross income includes the total income you earned in a financial year. This amount is an amalgamation of different income paths, like capital gains, salary, house property, through business, and other sources. To calculate your taxable income, exemptions, and deductions are taken off from your gross income. Note that your taxable income differs based on which tax slab you fall into.
Calculating Tax Payable
Income tax planning is not as simple as it may seem, but once you know all the necessary tax terminologies, paying income tax can become less of a hassle.
Begin by determining your taxable income. Start by calculating your total income from all sources, including employment, self-employment, investments, rental properties, and any other applicable income. Then, subtract any deductions or exemptions allowed by your tax laws. This will give you your taxable income. Once you have your taxable income, search the tax rates applicable to your taxable income.
Calculating income tax and planning on paying your income tax can be a complex process. Hence, it’s advisable to consult with a tax professional to avoid falling into any legal issues later.