Tax Planning an Effective Tool to Protect Your Income

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From the time taxes have come into existence there has been a constant struggle between the tax collectors and tax payers. The collectors want to collect more taxes so that the government will have more money to invest in the developmental works, hence improve the economy on the other hand it is us or the tax payers who want to reduce the tax liability. The government gives deductions and tax exemptions for some of the investment done by the assessee to encourage him to invest in some of the businesses.

The term Tax Planning refers to the use of the saving instruments (deductions & exemptions) given by the government so as to decrease the tax liability, but sometimes the word tax planning is misunderstood and the people choose the ways of tax evasion and tax avoidance. The tax planning is completely legal and is done keeping in mind all the rules and regulations.

For example; If Mr. X as an individual has an income of 5, 50,000 for the assessment year then the tax that he needs to pay is 70,000. Solution: according to the tax rates of assessment year 2009-2010 the calculation is as follows;

=50,000 x 30% = 15000 (Above 500000 30% Tax)
=200000 x 20% = 40000 (Between 300000-500000 20% Tax)
=140000 x 10% = 14000 (Between 1, 60,000 – 300000 10 %)
=3% education Cess on 69,000 (15000+40000+14000) = Rs 2070
Tax Payable = 15000 + 40000 + 14000 + 2070 = 71,070

If Mr. X decides to deposit Rs 70,000 to the Public Provident fund then the tax liability will change because his taxable income comes down to 4,80,000 and his tax liability will come down to 51, 500 this is called the Tax planning.

Tax avoidance is within the legal constrains and is done using the loopholes of the system. For example a company is thinking of starting a manufacturing unit and it has lot of land in the present city where its head office is located but it sets up the manufacturing unit in some of the northern states or backward states as there is 100% deduction.

Tax evasion is completely illegal. Here the person tries to show false figures or cook up the books so as to completely reduce the tax liability. For example the person may have purchased a car for personal use and while giving the details he puts it as used for renting and when he does it the depreciation amount that he will get increases and hence the total income decreases or in another case a company may just set up a dummy manufacturing unit in a backward state and prepare those parts in some of its own manufacturing units. The company gets tax deduction but it is illegal and if found guilty then it may be punished.

For More Information on Tax Planning to Protect Your Income: Click Here

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