Tax Planning: It's Not What You Earn

Tax is the largest lifetime expense for most middle-class citizens. You work for 12 months, but effectively, you work for the government for 3-4 of those months. While paying tax is a duty, paying unnecessary tax is financial negligence.

There is a fine line between Tax Evasion (Illegal: Hiding income) and Tax Planning (Legal: Using government provisions to reduce liability). In this module, we will learn how to navigate the complex Indian Tax System, updated for the latest Budget 2024-25 rules.

1. The Two Regimes: A Strategic Choice

Since 2020, India has had two tax systems running in parallel. The government is pushing towards the New Regime, but the Old Regime still makes sense for some.

The Breakeven Analysis

When should you stick to the Old Regime? Generally, if your total deductions (HRA + 80C + 80D + Home Loan Interest) exceed ₹3.75 - ₹4 Lakhs, the Old Regime saves you more tax. If your deductions are lower, the New Regime is mathematically superior and hassle-free.

2. Decoding the Old Regime Deductions

If you choose the Old Regime, you must fill your "Tax Buckets" efficiently.

Section 80C (The Big Bucket)

This allows a deduction of up to ₹1.5 Lakhs. However, many people fill it inefficiently with low-return insurance policies.

Strategy:
1. Check your EPF (Employee Provident Fund). If you earn ₹10L, your EPF might already cover ₹50k.
2. Fill the gap with ELSS Mutual Funds (3-year lock-in, equity returns). Avoid Endowment plans (LIC) for tax saving as returns are poor (4-5%).

Other Critical Sections

• Section 80D (Health Insurance): Up to ₹25,000 for self/family + ₹50,000 for senior citizen parents. Total benefit up to ₹75,000.
• Section 24(b) (Home Loan): Interest deduction up to ₹2 Lakhs per year for self-occupied property.
• Section 80CCD(1B) (NPS): An extra ₹50,000 deduction for investing in the National Pension System, over and above the ₹1.5L of 80C.

3. Capital Gains Taxation (The 2024 Update)

Investing generates profits (Capital Gains). The government wants a share. The rules changed significantly in the July 2024 Budget.

4. Tax Harvesting Strategy

How do smart investors pay less tax on their stock market gains?

Tax Gain Harvesting

You have a ₹1.25 Lakh exemption on Long Term Capital Gains (LTCG) from equity every year. If you don't use it, it lapses.
The Hack: Every March, sell stocks/funds that have a profit of ₹1 Lakh. Buy them back the next day.
Result: You booked the profit tax-free. Your "Buying Price" resets to the current higher price. When you sell in the future, your calculated profit (and tax) will be lower.

Tax Loss Harvesting

If you have Short Term Gains of ₹50,000 (taxable at 20%), you can sell a stock that is currently at a loss of ₹50,000.
Result: Net Profit = 0. Tax = 0. You can rebuy the losing stock immediately if you still believe in it, or switch to a better one.

5. Avoiding Tax Traps

1. Insurance as Tax Saving: Buying a ₹1 Lakh premium policy just to save ₹30,000 tax is bad math if the policy yields only 5%. You lose wealth in the long run due to inflation.
2. Last Minute Panic: Investing in March usually leads to bad decisions. Start your tax planning in April.
3. Ignoring Slab Rates on FDs: The interest on Fixed Deposits is fully taxable. For a 30% slab earner, a 7% FD yields only 4.9% post-tax (below inflation). Arbitrage Funds (taxed as equity) might be better.

Summary of Module 8

Tax Planning is not about paying zero tax; it is about paying the optimum tax.
• Switch to the New Regime if your deductions are low.
• Utilize the 80C and 80D limits fully if in Old Regime.
• Perform Tax Harvesting every March to reset your equity costs.

We have covered earning, saving, investing, and taxing. But what happens to your wealth after you are gone? In the next module, we discuss the often-ignored topic of Estate Planning.