Rahul, a mechanical engineer, met a Relationship manager at his bank branch last week. The RM kept pitching him with tax saving products. With so many financial products on the table, he was confused and couldn’t make an investment decision. He came back home confused between, what is tax planning and tax saving. He being a non-finance person could not understand the meaning of Section 80C.
For many like Rahul, we will explain today everything of Section 80C — the most loved section by the taxpayers under the Income Tax Act.
Difference between Tax Saving and Tax Planning
Tax Planning is something that most of us resist and abhor doing it from the start of every financial year. And we tend to repeat the mistake of waiting till the eleventh hour every time.
As the financial year draws to a close, we all start feeling the heat and realise that yes, now we have to invest in order to save tax. But have you ever wondered whether it is the prudent way for tax planning?
Remember, waiting until the last minute to undertake your tax planning exercise will often drive it towards a mere “tax saving” rather than “tax planning”; which in our opinion is a sub-optimal way to undertake a tax planning exercise.
Unlike “tax saving” which is generally done through investments in tax saving instruments / products, under “tax planning” we take into consideration one’s larger financial plan after accounting for one’s age, financial goals, risk appetite, and investment horizon (including nearness to financial goals). By adapting to such a method of “tax planning”, you not only ensure long-term wealth creation but also protection of capital. Hence, please remember to commence your “tax planning” exercise well in advance by complementing it with your overall investment planning exercise.
But before we get into tax planning, you need to understand what is a tax deduction…
What is a tax deduction?
A tax deduction is simply an item that helps you reduce your taxable income by the amount of the deduction. So, by utilizing that particular deduction, you can reduce the amount of income tax by reducing the amount of your taxable income.
For example: If you have a taxable income of Rs. 2,50,000 for the financial year, and you invest Rs. 70,000 in PPF and Rs. 30,000 in Equity Linked Savings Schemes, then your taxable income is: Gross Taxable Income: Rs. 2,50,000
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